LLC vs. S-Corp Ownership Restrictions

**nikko2** · 12-13-2009, 06:29 AM

I am helping a company incorporate and one of the founders is not a us-citizen. They want to form an s-corporation, but the problem is according to US tax law, only US citizens can own stock in an s-corporation. We are trying to figure out a way around this restriction for the foreign founder. The solution I am considering to sidestep the ownership restrictions of an s-corp is by having the foreign founder create a solo LLC and then have the LLC
purchase the s-corp shares. An LLC does not restrict ownership to only US citizens. Guidance on this question I would be appreciated.

**Bubba Jimmy** · 12-13-2009, 11:18 AM

This will not work. An LLC was not thought to be able to be an owner of S corp stock because it is not an "individual". The IRS has clarified that a single owner LLC can own stock in an S corp because the LLC is a disregarded entity. However, treating the LLC as a disregarded entity means that the foreign owner of the LLC would be treated as the individual owning shares in the S corp.

Why not just organize as a C corp if foreign ownership is necessary? That's the legal alternative.

**nikko2** · 12-13-2009, 02:26 PM

Thanks for your reply. That's what I figured. We thought about a c-corp, but the whole double taxation thing makes this less appealing. I guess that is the price we have to pay.

**KeyWestDan** · 12-13-2009, 05:21 PM

In this economy I commend you worrying about taxes and double taxation for a c corp. A c corp also allows you to issue more than one class of stock. This is very important when outside money is being used and you want to keep control of the corporation. There are also other advantages to c corps if you want to grow it. There is no difference in filing. The designation is only a tax matter and is just a written declaration to the IRS.

There are many ways to minimize taxes. Many of the biggest corporations in the U.S. pay little to no taxes. For a small corporation, you can pay salary, bonuses, take corporate trips, pay board members, etc. to reduce any profits that will be double taxed. And the corporate tax rate is fairly low.