The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Watch Out For Two Classes of Stock in an S Corporation!
Nov 06, 2011
Many farm operations use an S corporation. These corporations legally are the same as any other regular corporation, however, for income tax purposes, the shareholders have made an election to be taxed similar to a partnership.
One of the requirements of an S corporation is that there can only be ONE class of stock. You cannot have common and preferred stock in an S corporation. You cannot pay dividends on a non-pro-rata basis. This can trip up our farm clients. Many times, there will be children that own shares in the S corporation and the corporation will pay a dividend to the parents and forget to pay a dividend to the children on a pro-rata basis. If audited, the IRS can argue that this is a separate class of stock and disallow the S corporation.
The S corporation, however, is allowed to have both voting and non-voting stock. This allows the parents to transferred non-voting shares to the children and grandchildren and keep control of the operation by retaining the voting shares.
If you have an S corporation, please make sure to follow the rules when it comes to not having a second class of stock.