Voting Rights and S-Corporations

Many of your know that S-Corporations are prohibited from having more than one class of stock, but what does the government consider as leading to different classes of stock? According to Treasury Regulations section 1.1361-1, a “corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds”. However, “differences in voting rights among shares of stock of a corporation are disregarded in determining whether a corporation has more than one class of stock”. Therefore, it is possible to have voting and non-voting common stock that which otherwise has identical rights to distributions and liquidation, and still be eligible for S-corporation election.

If you’re intending to construct a S-corporation with different voting rights among its shares, it is best to consult with a tax specialist to better understand the specific consequences of how you intend to set up the capital structure of your corporation and how it may have an effect on your eligibility to elect S-corporation tax treatment.