S Corp Question

[erchess]

TTB SB 3-4 states A number of events can occur that may create a second class
of stock, which will invalidate S corporation status. For example, if a
shareholder makes a loan to the corporation, and in turn the shareholder
receives an increased share of income or profits, the transaction
could be considered a second class of stock and S status may be in
jeopardy. Loans between the shareholders and the corporation should
be closely monitored to avoid violating this provision.

Ok fine. How can an S Corp set things up so that the principal financier gets reimbursed for the investment and then shares equally in the rest of the profits?

[Bees Knees]

Set it up as a loan. Principal and interest. Period.

Anything fancy like all profits go to the financier until paid back is a second class of stock.

[Bees Knees]

BTW, doing it the way you suggest is a legit way of running a business. You just can't do it through and S corp. I would set it up as an LLC, taxed as a partnership. There are no restriction on the finance arrangements with partnerships. Anything that has economic substance will do.

[erchess]

Unfortunately

They created their Corp and made a proper S Election before hiring me. Then they started creating notarized contracts without consulting me or the tax lawyer who got them started and made the S Election.