S corp issue convertible debt to investor

[winnie]

S corp client is desperate for funding to continue their business quest. Have found an investor who might fund with debt convertible to preferred stock. Seems to me S corp would have a second class of stock upon issuance of the debt, even though the events have not occurred which would cause the preferred stock to be issued at that time. Looking primarily at Treas Reg. Section 1.1361-1(l)(5) and (4).

Anybody seen this before and have a different opinion?

[ChEAr$]

Second class

S corp client is desperate for funding to continue their business quest. Have found an investor who might fund with debt convertible to preferred stock. Seems to me S corp would have a second class of stock upon issuance of the debt, even though the events have not occurred which would cause the preferred stock to be issued at that time. Looking primarily at Treas Reg. Section 1.1361-1(l)(5) and (4).

Anybody seen this before and have a different opinion?

of stock it surely would be and thereby void the S election.

Nothing wrong of course with making it convertible to common.