S Corporations and Stock Ownership Issues

Shareholder Specifics
Pay careful attention to how employees make withdrawals from an ESOP. It is illegal for employees to transfer S corporation stock directly into an

IRA, and allowing them to do so could jeopardize your corporation's legal status. You may choose to require departing employees to take ESOP distributions in cash instead of in stock.

The Act also increased the number of individuals who can hold stock in an S corporation from 35 to 75, and S corporations are allowed to issue only one class of stock. Because the Internal Revenue Code restricts who can hold S corporation stock, make sure shareholders don't transfer their shares to ineligible entities, such as partnerships, C corporations, nonresident aliens, limited liability companies, or foreign trusts. Eligible shareholders include:

• Citizens or resident aliens of the United States
• Estates
• Certain trusts, such as pension trusts
• Charitable organizations
• Employee stock ownership plans