Free at Last

You no longer have to be up to your "S" in regulations.
Magazine Contributor
2 min read

This story appears in the December 2001 issue of Entrepreneur. Subscribe »

With the economy dragging, a bipartisan effort is afoot in Congress to ignite the afterburners on subchapter S corporations. Over the past decade, S corps have lost some of their allure as states (and the IRS) have authorized creation of limited liability corporations, which have the advantages of S corps without the federal regulatory disadvantages.

So why not switch an S corp to an LLC? Because an S corp cannot be converted to an LLC without paying taxes on appreciated gains on assets. That's why Sen. Orrin Hatch (R-UT) is sponsoring the Subchapter S Modernization Act (S. 1201). "Subschapter S, as enacted and modified over the years, contains a variety of limitations, restrictions and pitfalls for the unwary," Hatch says. The bill, backed by the U.S. Chamber of Commerce, would make a number of numbingly technical changes in rules on who can be shareholders, stock classification, accounting for losses and S status termination.

The S corp bill's main drawback is that it would cost the federal government more than $3 billion over 10 years, although that estimate has not been formalized by the Congressional Budget Office. The current strategy is to attach the bill as an amendment to an increase in the minimum wage.


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Stephen Barlas is a freelance business reporter who covers the Washington beat for 15 magazines.

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