Preface: Corporations are restricted on affiliate tax structures. This article is to provide awareness on corporate affiliate ownership and the pertinent tax code restrictions and permissions.

Corporate Affiliates

Corporations have certain ownership prohibitions on affiliate ownership. If you are purchasing other corporations (either S-Corporations or C-Corporations) with a corporate parent, certain restrictions may be applicable.

First, C-corporations can file a consolidated return with any other C-Corporation they are affiliated with. C-Corporation stock can be held by either individuals, S-Corporations or C-Corporations. For instance if 555, Inc. owns 100% of 444, Inc. stock, and both corporations are taxed as C-Corporations the ownership structure is permissible for tax purposes. Now suppose 555, Inc., the parent, elects S-status. There is no prohibition on the S-election because S-Corporations can be shareholders in C-corporations. However, 444, Inc. could not elect S-Corporations status because S-Corporation stock must be held mainly with individual stock ownership. If an S-Corporation such as 2015, Inc. was acquired by a C-Corporation 555, Inc. the 2015 Inc. affiliate/subsidiary would default to a C-Corporation immediately upon purchase because C-Corporations cannot own S-Corporation stock. Most often C-Corporation status is not advantageous for active operating businesses. In addition, S-Corporation stock with the ownership restrictions, cannot be owned by a multimember LLC or partnership. Corporations are designed to be permanent entities while LLC’s are designed to have a defined entity lifespan. Some states when legislating LLC’s even limit the number of years an LLC can exist. There are nuances to the rule of S-Corporation ownership when working with say single owner LLC’s, or disregarded entities. You need a tax advisor to manage your complex entity tax architecture when relevant to your business decisions.

Corporations in many states are permitted to be partners in partnerships when the “person” is defined to include “corporation” in the state statutes. These statutes are standardized in most states; so you could have a C-Corporation be the general partner in limited partnership. So two corporations could share general partnership risk in joint venture partnership for achievement of synergistic values. Many times in entrepreneurial ventures this is not optimal because the operating corporation has asset risk. In most instances corporations should not be general partners exclusively for that title because of the corporate formalities required for regulation compliance, i.e. board meetings, officers, etc. If you are involved in buying, acquiring or launching an entity, you need a CPA and attorney to appropriately engineer the architecture.

S-Corporations because they require in most instances, individual stock ownership, typically are restricted from owning other S-corporation stocks. However, there are loopholes in the tax code. One of these loopholes is a QSub. A QSub is a qualified subchapter S subsidiary. A QSub election is filed with Form 8869. An S-Corporation can have one or more qualified S-subsidiary QSubs if it owns 100% of the subsidiary corporation’s stock and files a QSub election. The QSub election results in a deemed liquidation of the subsidiary corporation into the parent corporation S-Corporation. Subsequent the deemed liquidation, the QSub is not taxed as a separate corporation. The subsdiaries assets, liabilities, and income, deductions, and credits are combined into the parent S-Corporation tax filing.

Summary: S-Corporation must be owned by individuals, with a few exceptions; such as a single member LLC. S-Corporations are permitted to own up to 100% of an LLC (limited liability company). C-Corporations cannot own S-Corporations; but S-Corporations can own other S-Corporation if a QSub election is made with Form 8869. If you are acquiring affiliate corporations or LLC’s, talk with your CPA and attorney.