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Stock Classes

PostedOctober 28, 2023

By Jason Watson, CPA
Posted Sunday, October 29, 2023

One of the rules of an S Corp is to only have one class of voting stock, and this can be a problem at times if you are trying to bring in a new partner or create a vesting schedule for future owners. You can have two classes of stock as long as the only difference is the voting rights between the stocks. See IRC Section 1361(c)(4). Quite the page turner.

So, if you want to provide distributions to a person but not give them control, assign him or her nonvoting stock (such as a retired parent who needs some money and enjoys a lower tax bracket than you).

Truly stock classes don’t trip up many S corporations. What can prove to be tricky and expensive to solve is expanding the ownership of the S Corp through key employees or other graduated buy-in situations. Keep reading.

Jason Watson, CPA, is a Partner and the CEO of WCG CPAs & Advisors, a boutique yet progressive tax, accounting and business consultation firm located in Colorado serving small business owners and taxpayers worldwide.

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Previous Distributions in Excess of Shareholder Basis
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