When an S corp holds C corp stock, the S corp becomes the beneficial owner, and the C corp remains a separate legal entity with its own tax identification number and regulatory obligations. By placing the C corp under an S corp parent, the owners preserve the pass-through taxation for the overall group while allowing the C corp to operate with greater flexibility in areas like equity structure and employee compensation.
How an S Corp Can Own a C Corp: Formation and Compliance
Operational and Compliance Considerations Maintaining an S corp as the owner of a C corporation involves ongoing compliance with both subchapter S and subchapter C rules. These arrangements must be priced at arm’s length and documented carefully to avoid issues with the IRS or state authorities.
The parent S corp holds the stock of the C corp as an eligible shareholder, and this arrangement keeps the overall entity within the pass-through tax framework. The C corporation files its own return and pays tax on its profits at the corporate level, then any dividends paid to the S corp are generally taxed at the shareholder level.
How an S Corp Can Own a C Corp: Formation Process and Compliance
The Internal Revenue Code restricts S corps to specific shareholder types, including individuals, certain trusts, and estates, while excluding partnerships, non-resident aliens, and most foreign entities. Because the S corp itself is not subject to federal income tax at the corporate level, the profits filter through to the individual owners, avoiding double taxation at the corporate layer.
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