Special Trivia Question for 10/20/2026 (S Corp Elections Gone Wrong)

As described earlier, an eligible S Corp cannot have a “second class of stock.” Three of these situations are examples that would disqualify an S Corp. Which of these does NOT create a second class of stock that would disqualify the S Corp election?

A. Voting and non-voting shares of stock
B. Preferred and secondary distributions of stock
C. Liquidation preferences (i.e. some stock shares are entitled to higher percentages of liquidation proceeds)
D. Distribution percentages that do not match ownership percentages

Generally, a corporation is treated as having only one class of stock if all outstanding shares of the corporation's stock confer identical rights to distribution and liquidation proceeds. Answers B-D are examples of situations that do not meet these regulations. However, the tax code explicitly says that “a corporation shall not be treated as having more than 1 class of stock solely because there are differences in voting rights among the shares of common stock.”