Corporation of Individuals

 Puerto Rico income tax treatment of a Corporation of Individuals and its shareholders is similar to that of a Special Partnership and its  partners.  The Corporation of Individuals is not subject to the corporate income tax, but rather, like a Special Partnership, it is merely a conduit entity.  The income, deductions, gains, losses, and credits flow through  to its shareholders with the same characteristics in the hands of the corporation.

The special tax treatment provided for a Corporation of Individuals is available only if the corporation is a small business corporation and its  shareholders consent to the corporation's election to be taxed as such.

The small business corporation must:

1. Be an eligible domestic corporation.
2. Not have more than 35 eligible shareholders; and
3. Have only one class of stock outstanding.

All of these requirements must be met when the election is made and at all times thereafter.  Failure at any time to qualify as a small business corporation terminates the election, and as of the date of termination, the  corporation is taxed as a regular corporation.

Certain parties are prohibited from owning stock of the corporation. The stock of a Corporation of Individuals may be owned only by:

1. Individuals who are citizens or resident aliens of Puerto Rico,
2. Estates, and
3. Certain trusts.

Nonresident aliens, corporations, partnerships, and certain trusts are not allowed to hold stock in a Corporation of Individuals.