Question

please discuss at least one factor that will result in the involuntary termination of an S-Corporation. Give your opinion on why the identified factor was included as an involuntary termination.

Answer 1

An involuntary termination of an S Corporation if it ceases to fulfill the requirements of a small business corporation, or its passive income exceeds the passive income limitation.

Under S. 1361 ( b) , S corporations are required to meet the following criteria to qualify as a small business corporation:

a. It must be a domestic corporation.

b. It must have only allowable shareholders in the form of individuals, trusts and estates.

c. The number of shareholders should not exceed 100.

d. It cannot have more than one class of stock.

e. It should not be an ineligible corporation.

For example, it might be a domestic corporation, but it is a domestic international sales corporation. Because its business is not confined to domestic territories, it is ineligible to be qualified as an S corporation. That would lead to an involuntary termination of the S corporation status.