Case Study : Colson, Inc.

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I. Introduction
Colson, Inc. is a successful company with eight shareholders, six of which are individuals and two which are family limited partnerships. None of these shareholders are related and only one of them currently works for the company. The shareholders have become frustrated with the double taxation imposed upon them by the company’s C corporation status and would like to explore the potential of converting to a pass-through entity such as an S corporation or LLC. They have asked our firm to advise them on this possibility.
II. Eligibility Requirements for Conversion
For a Subchapter C corporation to be eligible for an S corporation election it must be a “small business corporation.” I.R.C. § 1361(a). To be considered a small business corporation, it must be a domestic corporation and meet four distinct requirements. I will discuss each requirement below and apply it to the facts provided our firm by Colson Inc.
The first requirement is that the corporation must not have more than 100 shareholders. I.R.C. § 1361(b)(1)(A). Colson meets this requirement because it has only eight separate shareholders. The company will not need to redeem or purchase any stock to facilitate its ability to comply with this requirement.
Secondly, the corporation must have only shareholders who are individuals, estates, or certain types of trust or tax exempt organization and are not a partnership or corporation. I.R.C. § 1361(b)(1)(B). Colson has eight shareholders, six of whom are

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