Depending on how you originally established your business, filing an S-Corporation (also known as an “S-Corp”) election could require the permission of your spouse – even if you didn’t plan for them to hold shares. Because California is a community property state, the property acquired by either partner during the marriage is considered both the property owner and the spouse 50/50. This also includes your corporation, if it was created during your marriage.
The S-Corp Election Will Require Your Spouse’s Signature
Community property laws specify that property and earnings during marriage are shared between spouses. No, this does not necessarily make a spouse a shareholder of an S-Corp, but they potentially have a community property interest in the shares of the corporation. The S-Corp election for businesses requires the permission of all of its shareholders, and as such, the other spouse must also include their information and acceptance of the agreement. It is crucial that both spouses sign, even in the case of a solely operated business that is shared by community property law.
Ensure You Receive Everyone’s Signature
If your business is found to have filed the S-Corp election without the agreement of every shareholder, you risk being stripped of S-Corporation status. The IRS may conduct searches through past records to ensure that your business filed properly, so ensure that your filing is handled with care. Being stripped of S-Corporation status means your business will be treated as a C corporation for tax purposes, which holds entirely different tax burdens than an S-corp.
For those businesses that fail to include the consent of all shareholders, the IRS may provide a procedure through which your business will now be changed into an S-Corp. If your business has properly reported all of the necessary tax information as required by the S-Corp election ever since it was accepted, the IRS may accept another application, and action won’t be taken.
Community Property May Be a Barrier, Depending on Your Marriage
IRS Form 2553 (the IRS form used to elect S-Corp taxation) not only specifies that both spouses have to sign, but also that all spouses of an S-Corp shareholder are residents in the United States. This may cause trouble for S-Corp shareholders with non-resident and/or non-citizen spouses, even if they weren’t intended to be an owner of the business. To be considered a resident of the United States, the spouse must be either a lawful permanent resident or spend enough time within the country. Otherwise, the S-Corp election may be revoked with the business’s status. As such, S-Corps should be careful to only distribute shares to those who qualify.
If your business is in need of assistance with S-Corp elections, or for any other issues your business may face, contact the Law Offices of Tyler Q. Dahl. We’re focused on helping your business prevent issues before they happen, and setting your business up for success.
Dahl Law Group
