Start Your Own Corporation. Garrett Sutton

irrevocable trust to hold the shares and transferred them from her name to that of the trust.

      Sometime thereafter the company received a notice from the IRS. Their S corporation status was terminated.

      Why?

      Because Burnham’s Baked Hams, Inc. had the following:

       1. A non-U.S. shareholder (Basil the Canadian)

       2. More than one class of stock (preferred for Basil and common for the others)

       3. A trust as a shareholder (Elizabeth’s trust).

      Any one of those three is enough to terminate S status. And that is how Jeanne, Elizabeth, and Bernie learned the problem with an S corporation. Things can be going along just fine when through some unforeseen transaction (a shareholder unwittingly sells to a nonresident alien, for example) you lose your tax status. And when that happens you become a C corporation and cannot be taxed as an S corporation for five years.