When a corporation is originally formed with the Florida Division of Corporations, it exists as a C Corporation. Unless the corporate shareholders decide otherwise, the company will remain as a “C-corp” throughout its existence.
Nonetheless, if all the shareholders of a C corporation decide to give their consent to change the company’s tax status, it is possible to file Form 2553 with the IRS to transform the company into an S corporation.
What happens when a shareholder of an S corporation dies in Florida? Keep reading to find out.
Establishing an S Corporation in Florida – The Essentials
The S corporation election may be filed any time after a Florida corporation is formed – either immediately after filing Articles of Incorporation or years later.
Essentially, C corporations are taxed as separated legal entities, reporting profits and losses on a separated tax return. Therefore, a C-corp must pay taxes on the company’s profits while its shareholders must report and pay income taxes on the share paid to them by the corporation.
Instead, any profits and losses generated by S-corps pass through the business to the shareholders. Therefore, S-corp shareholders can receive a “reasonable salary” (subject to applicable taxes) while any additional distributions to them are considered dividends (which are subject to lower taxes).
Typically, an S-corp format is ideal for smaller corporate businesses focused on treating all owners the same way.
What Happens When a Shareholder of an S Corporation Dies in Florida? – Taking a Closer Look
The matter of determining the distribution of S corporation stocks upon the death of the shareholder who owned them is a quite complex subject.
Originally, US Congress might have implied that an S-corp shareholder’s death would terminate the company’s S-corp election. Hence, they enacted specific regulations providing that the estate of a deceased S-corp shareholder is a “permitted shareholder” while the estate is being administered.
If an S-corp shareholder decided to transfer hisor her share of interest in the company to a trust, the trust will need to qualify as a permitted shareholder during administration. Specifically, the IRS requires the trust’s election either as a qualified Subchapter S trust (QSST) or an electing small business trust (ESBT).
A Subchapter S trust (QSST) remains as a permitted shareholder of the S-corp during the life of the deceased shareholder’s income beneficiary.
In case the passing of the beneficiary results in a failure of the trust to qualify as a Subchapter S trust (QSST), the arrangement will continue to hold the decedent’s share of interest within a two-year period following the death of the beneficiary.
Once the two-year period is gone, the share of interest in the S-corp will continue to be held within the trust. In such a case, if the trust cannot qualify as a permitted shareholder, the corporation’s status as an S-corp will terminate.
While the trustor (in this case, the S-corp shareholder who transferred his or her interest in the company to trust) is still alive, the trust remains as a permitted corporate shareholder in the company.
Upon the death of the owner and its beneficiaries, the trust may continue to be a permitted shareholder for a two-year limit following the decedent’s passing. Once the limited period is over, the trust needs to qualify either as a QSST or ESBT to prevent the termination of the corporation’s election as an S-corp.