Tuesday, January 3, 2012

What is a QSub and Why Do I Care?

It is possible for one corporation to own and operate multiple different businesses as “divisions.”  But for liability reasons, smart business owners generally put each separate business into a separate corporation.  This can be done in the form of a parent-subsidiary organization structure or a brother-sister organization structure.  Both structures have their advantages and disadvantages.  In a parent-subsidiary structure, all of the income and expense of the multiple entities is reported on the parent corporation’s income tax return.  In a brother-sister structure, each of the corporations must prepare and file it own income tax return.   

If the owners of an “S” corporation with multiple businesses wish to utilize a parent-subsidiary structure for liability reasons, they need to set up qualified subchapter S subsidiaries (“QSubs”).  Under federal income tax law, “S” corporations are not permitted to be owned by corporate shareholders.  As a result, the subsidiary corporations will be taxable as regular “C” corporations unless an election is made to treat them as QSubs. 

An “S” corporation elects to treat an eligible subsidiary as a QSub by completing and filing IRS Form 8869. The election form must be signed by a person authorized to sign the “S” corporation's return.  The election can be made by the “S” corporation parent at any time during the tax year and is effective on the date specified on the election form or on the date the election form is filed if no date is specified. The effective date specified on the form cannot be more than two months and fifteen days before the date of filing and cannot be more than twelve months after the date of filing.

When an election is made to treat a subsidiary as a QSub, the subsidiary’s separate existence is ignored for federal income tax (but not payroll tax) purposes.  All of the subsidiaries income and expenses roll-up into, and are reported as part of, the parent’s “S” corporation income tax return.  The QSub is still required to get its own employer identification number and collect, deposit, pay and report payroll taxes and income tax withholding.  The QSub’s separate existence also continues for state law contract and liability reasons. 

So by setting up separate subsidiaries and electing to treat the subsidiares as QSubs, the "S" corporation owners have maintained taxation of their business income as "S" corporation  income, while adding additional state law liability protection.  Please call or email if you want to know more how to use or set-up QSubs as part of your overall business structure.  Jsenney@pselaw.com or 937-223-1130. 

AND ONE MORE THING.  Ohio law permits control shareholders to eliminate minority shareholders as part of a merger.  If you would like to know more about how to structure a merger transaction, please give me a call or email.   Jsenney@pselaw.com or 937-223-1130.

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