Can an S Corporation Own a C Corporation?

I was asked this fundamental, basic question today:

Can an S corporation own a C corporation?

Ignoring for a minute whether a C corporation is the right choice of entity for a subsidiary of an S corporation–which it may or may not be, depending on the circumstances–the technical answer to the question is:

Yes! An S corporation can own a C corporation. 

That wasn’t always the case. In the past, Internal Revenue Code Section 1361(b)(2) used to prevent S corporations from being part of an affiliated group of corporations. The rule stated generally that an S corporation couldn’t own 80% or more of the stock of another corporation.

This changed when the Small Business Job Protection Act of 1996 amended Section 1362(b)(2) to remove this prohibition. So, starting in 1997, S corporations can own subsidiary C corporations.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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