Many insurance agencies have chartered themselves as sub-chapter S corporations over the years. The 'S Corp' was created so that companies could obtain the limited liabilities of a corporation while enjoying the continued benefits of flow-through profits, to be taxed only at the individual's level. Although LLCs (Limited Liability Corporations) are now the rage, existing corporations find that expensive restrictions prohibit them from changing to this new form of company.
The 1996 Tax Reform Act added thousands of pages of tax law to the books. A few of these regulations have actually helped the course of small businesses. For instance, the transfer of certain family-owned businesses have been excluded from taxation. More positive twists are being encountered by S corporations as the law has had time to mature.
Some of the benefits are:
- An S Corp can now have wholly owned subsidiaries. For instance, if an agency is acquired, and for financial or payout reasons it must be kept separate, it's now permissible for your S Corp to own another entity. More important, in the past if you owned separate corporations and one lost money while the other profited, you couldn't offset the losses of the former with the profits of the latter. Now you can have two or more wholly owned subsidiaries and consolidate returns to offset the losses of one with the profits of the other.
- An S Corp can now have 75 shareholders (the limit used to be 35). If spouses are involved, you can double that number to 150. This is important in some 'virtual insurance agencies' and mergers and acquisitions, in which many shareholders are involved in the parent company.
- It's now possible to elect S Corp status retroactively. Previously, if you wanted to move from a regular corporation to an S Corp, you had until March 15 to make the change. Now, you can create an S Corp and transfer your C Corp stock into it at any time in the year, with the same effect of having the S Corp all year. This is important to businesses that have been losing money and then find themselves in a profitable situation mid-year. This rule allows you to take advantage of the S Corp pass-through of profits.
- An S Corp can now have an Employee Stock Ownership Plan (ESOP). This has long been a problem with S Corp agencies whose owners wished to begin an ESOP and were forbidden by the restrictive shareholder rules.
Other, more esoteric rules make S Corps even more flexible for small businesses. See your tax professional for more advice on how these rules can help you.