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S-corporation shareholders may benefit from recent legislation

One of the drawbacks of doing business as an S-corporation is the limitation on the number of shareholders that it may have. However, the 2004 Jobs Act contained some good news for S-corporations. First, the maximum number of permissible shareholders was raised from 75 to 100. Second, family members could elect to be treated as one shareholder for purposes of determining the number of permissible S-corporation shareholders. A family is defined as the common ancestor and all lineal descendants of the common ancestor, as well as spouses, or former spouses, of these individuals.

At the time the election was made, an individual was not considered a common ancestor if the individual was more than six generations removed from the youngest generation of shareholders who were members of the family.

Recent legislation entitled the “GO Zone Act” took the 2004 legislation one step further for S-corporations, by repealing the election requirement for family shareholder treatment. Now, six generations of a family are automatically considered to be one S-corporation shareholder. The date for determining who comprises the six generations is the later of the date that the corporation elects to be treated as an S-corporation, the date that the family first holds stock in the S-corporation or October 22, 2004. The new legislation also treats the estate of a family member as a member of the family for determining the number of permissible shareholders.

  • Partner

    John is Chair of the firm's Estate Planning Department. He also leads the firm's Senior Partner Committee, and is a member of the firm's Finance Committee. John, a former Certified Public Accountant, began his career in the tax ...

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