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Do changes lie ahead for S-corporations?

Many business analysts have been touting the end of the age of the S-Corporation. They cite the rise in interest in the new Limited Liability Corporation (LLC), which comes as interest in S-Corporation status is declining. Among the major reasons for the ebb of the popularity of the S-Corporation are the restrictions placed on such businesses by current tax laws.

But help appears to be on the way for the beleaguered S-Corporation, in the form of pending legislation that could relieve many of the heavy burdens that have been placed on S-Corporations by confining tax laws.

Imagine your company as an S-Corporation with the following advantages--all part of legislation that has already been filed:

* Up to 50 shareholders, instead of the current limit of 35. In addition, all members of the same family (not just a husband/wife combination) would be treated as a single shareholder.

This would make it easier to reward key employees with stock, possibly even preferred stock.

* Tax exempt organizations would be allowed to become S-Corporation shareholders. This includes employee stock option plans (ESOPs). Currently, the prohibition of tax exempt stock ownership is a major obstacle in closely held businesses using ESOPs.

* Authorize the issue of "plain vanilla" preferred stock, which would be allowed to be treated as a debt for tax purposes. This means that certain "preferred stock freezes" could be used by S-Corporations, with the "interest" on the preferred stock/debt being deductible.

* S-Corporations would be allowed to have a subsidiary or to be a subsidiary of other S-Corporations. This would allow S-Corporations to have tiered structures, just like other types of companies.

* The types of trusts which could be S-Corporation shareholders would be significantly expanded. In addition, the period that a testamentary trust could hold shares would be extended.

* Fringe benefit restrictions for shareholders would be removed. S-Corporation shareholders would gain the same treatment as employees of regular corporations. This includes items such as health insurance.

* Charitable contribution rules would become the same as for C-Corporations. Currently, S-Corporations are severely restricted by rules for the contribution of inventory and scientific property.

The personal guarantees of shareholders would be allowed to be included in the basis for determining allowable losses. Debt guarantees would be treated as they are in partnerships. Thus, the form of the debt would no longer overshadow the substance, which is the risk of the shareholder.

These changes are not just wishful thinking. The legislation amending the regulation of S-Corporations has the support of many congressmen and as well as business organizations.

Clearly, these changes would affect the selection of corporation status for thousands of businesses. Successful passage of the new regulations could be just the shot in the arm needed to maintain the popularity and viability of the S-Corporation.

COPYRIGHT 1994 National Association of Credit Management
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Author:Koppel, Michael D.
Publication:Business Credit
Article Type:Letter to the Editor
Date:Oct 1, 1994
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