United States

IRS approves restructuring around 100-shareholder limit for S corporations


S corporations that are adding shareholders have typically faced a challenge as they approach the 100-shareholder limit–change entities or reduce shareholders? The IRS recently ruled that an S corporation could proactively restructure its ownership in order to avoid exceeding the 100-shareholder limit that applies to S corporations.

The ruling concerned three existing S corporations, including one (X) that had close to 100 shareholders. The shareholders of X planned to restructure their business by undertaking several steps that would result in X becoming a general partnership under state law and being wholly owned by the other two S corporations. The current shareholders of X would become shareholders in one of the remaining two S corporations. Over time, the number of shareholders in the two S corporations likely would exceed 100 on a combined basis. However, neither corporation would itself have more than 100 shareholders.

The ruling provides that the two S corporations will retain S status as long as each separately remains below the 100-shareholder limit. This ruling provides an additional avenue for an S corporation approaching the 100-shareholder limit to restructure its activities and successfully stay under the statutory limit by bifurcating the shareholder group into separate ownership entities.  

Mark Forde