An S corporation can only have one class of stock.
In order for a corporation to qualify to elect special tax treatment under subchapter S of the Internal Revenue Code, it must comply with certain rules established by the Internal Revenue Service (IRS). The S corporation election is reserved for small corporations that do not intend to ever have more than 100 shareholders or to raise money by selling stock to the public.
Regulations
Regulations section 1.1361-1(l) of subchapter S of the Internal Revenue Code states that a corporation can elect to be an S corporation only if it has one class of stock. This is a prerequisite to making the election and cannot be exempted.
Classes of Stock
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. Most small businesses that are incorporated issue one type of "Class A" stock by default. In fact, for the small business, stock is never actually issued; ownership interest is represented on the books as percentages. As long as there is no distinction in equitable rights between the stockholders (some owners are entitled to be paid before others in the case of liquidation instead of by the percentage of the business owned, for example) a corporation would meet this requirement.
Verification
Generally, a corporation's articles of incorporation will indicate the type, number and value of the initial authorized shares of stock. Unless a corporation's board of directors has voted to change this initial designation, the articles will verify the corporation's existing stock structure.
Voting Rights
Don't mistake differences in voting rights for differences in classes of stocks. A corporation can establish a tiered approach to voting (some shareholders' votes have more weight than others per the bylaws, for example) without issuing multiple classes of stock. Voting has no impact on equitable interest.
Practical Considerations
If your corporation meets all the other requirements for an S election and you have determined that the special tax treatment would benefit your bottom line, consider making adjustments to the structure of your stock if your corporation has more than one class outstanding. Talk to an attorney or an accountant for the advantages and disadvantages of such a change.
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