A1. A Subchapter S (or S corporation) bank is, in most respects, just like any other finanicial institution.
The unique quality of an S corporation is in the way that they are taxed. Rather than paying corporate taxes, the tax implications of the profits or losses of the bank are realized on the individual tax returns of the bank shareholders. In that the maximum individual tax rate is lower than the corporate tax rate.
A2. Ineligible shareholders of an S corporation include:
A3. In addition to raising the number of permissible shareholders from 75 to 100, the American Jobs Creation Act also introduced the term “members of a family” to the world of Subchapter S taxation. The 2004 legislation had the effect of treating individual shareholders (including their spouses or former spouses) who were “members of a family” as a single shareholder for Subchapter S purposes. Which shareholders qualified as members of a family was determined by counting backwards up to six generations from the youngest generation of shareholders, as of a specified date, to determine what is called a “common ancestor.” All of those shareholders who were lineal descendants of this common ancestor qualified as members of a family.
A4. Because S corporations are “pass-through” entities, they are restricted in the types and number of shareholders they may have. In general, only individuals, estates and certain trusts qualify to own S corporation stock. Additionally, S corporations may not have more than 100 shareholders; however, for purposes of determining the number of shareholders, all “members of a family” are treated as a single shareholder. The term “members of a family” is defined under Subchapter S of the Internal Revenue Code (IRC) to generally include all family members within six generations, as well as their spouses and ex-spouses. Failure to adhere to these requirements will cause an inadvertent termination in the entity’s S election. In the case where an existing shareholder proposes to transfer his/her shares, whether by gift, sale or otherwise, the agreement should require the shareholder to first notify the institution of the proposed transfer and all material terms. This will allow the institution to verify that the transferee qualifies as a shareholder under the terms of the shareholder agreement.
A5. According to the Federal Deposit Insurance Corporation (FDIC), there are currently 2,200 financial institutions or bank holding companies organized as S corporations.