An S corporation can, in fact, invest money in publicly traded stocks and mutual funds. There are, however, ownership restrictions on who may own shares in an S corporation. Generally, however, S corporations may own shares in mutual funds, C corporations, other S corporations and LLCs.
Entity Planning Overview
S corporations provide two key advantages for the shareholder or shareholders: They provide limited liability, meaning that they help shield the owner's personal assets against claims on the business and they avoid the double taxation inherent in C corporations, which must pay corporate income taxes before they issue taxable dividends. S corporations are pass-through entities, which means there is no corporate income tax on S corporations. Instead, profits "pass through" to the shareholders' individual income tax returns.
Shareholder Restrictions on S-Corporations
Only U.S. persons can own S corporations. A "U.S. person" can be a U.S. individual or another S corporation, estates or certain kinds of trusts. Non-US residents cannot own S corporation shares, nor can other S corporations. S corporations can only issue one class of stock. They may not have more than 100 shareholders.
Stocks and Mutual Funds in the S Corporation Portfolio
There are no rules prohibiting S corporations from purchasing stocks in C corporations or mutual funds for their own portfolios. S corporation ownership restrictions prohibit them from owning shares in other S corporations.
Any stocks or shares in a mutual fund should be listed as assets on the company balance sheet, below the cash listing, and in general order of their liquidity. Most mutual funds and publicly traded stocks have fairly high liquidity, meaning they can be readily converted to cash. They should be listed above more illiquid assets on the company balance sheet.
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