Updated: Aug 17, 2020
Are you thinking about raising money for your "s" corporation? If so, consider that the IRS places the following rules on any business taxed as an "s", regardless of whether you are a corporation or a limited liability company. The IRS rules applicable to businesses with "s" taxation are:
You can have no more than 100 shareholders for corporations, or members for LLCs, eliminating the viability of raising money through a crowdfunding (Regulation CF) or a mini-IPO (Regulation A+).
You can only have one series of stock/membership units, which means you cannot issue special rights or privileges to new investors - a deal killer for most investment groups.
There are tight restrictions on who can participate as an owner in a business taxed as an "s" corporation.
Because "s" corporations are treated as "pass-through" tax entities, if the business decides to retain profits in its account rather than pay them out to the shareholders or members at the end of the year, then the owners may find themselves owing taxes without having received the monies to pay them - a situation commonly referred to as "phantom taxation".
If you would like to raise money in your "s" corporation, but discover that one or more of these IRS-imposed restrictions is hindering your fundraising efforts, there are options to change your business structure. Depending on circumstances unique to your business, you may be able to convert your business from a limited liability company to a corporation, or vice versa, and you may also be able to change your tax election with the IRS. This way, you can convert into the right entity for your prospective investors.
If you would like to make further inquiry regarding whether your corporate structure is right for your business purpose, contact me using the contact tab above.