Can (or Should) My S Corp Make Investments?

This is a question we hear all the time from our Lettuce customers. Yes, an S Corp can technically make investments using its corporate funds, similar to an individual, but this strategy often backfires. The short answer? Keep your investments in your personal accounts and your S Corp focused on business operations.
Here's why.

The Appeal (And Why It's Misleading)

At first glance, holding investments in your S Corp might seem attractive. You're already paying to maintain the structure, so why not use it for everything? Some solopreneurs think they can defer taxes or get special treatment by routing investment income through their business entity.

Unfortunately, the reality is far more complicated and costly than most people realize.

The Tax Headaches

The IRS puts strict rules on S Corps that hold passive investments, and violating them can cost you your S Corp status entirely. Here are the three biggest tax traps you need to understand.

1. Passive Income Limitations

Here's the big one: S Corporations face strict limits on passive investment income. If more than 25% of your S Corp's gross receipts come from passive sources (like dividends, interest, rents, or capital gains) for three consecutive years, your S Corp election terminates automatically.

Lose your S Corp status, and you're suddenly a C Corporation facing double taxation. That’s a disaster scenario for most solopreneurs.

2. Excess Passive Income Tax

Even before termination, if passive income exceeds 25% of gross receipts AND you have accumulated earnings and profits from a prior C Corp year, you'll pay a corporate-level tax on

the excess passive income. This defeats the entire purpose of being an S Corp.

3. Complicated Basis Calculations

Every investment transaction affects your stock basis in the S Corp. Gains increase it, losses decrease it. You'll need to track this meticulously for every trade, every dividend, every capital distribution. Miss something, and you could face unexpected tax consequences or lose valuable loss deductions.

The Administrative Burden

Beyond taxes, holding investments in your S Corp creates ongoing headaches. These are the main ones to consider:

Bookkeeping complexity: Every investment transaction needs to be recorded in your corporate books. Buying Bitcoin? That's a journal entry. Selling some shares? Another entry. Receiving dividends? You guessed it. This substantially increases your bookkeeping costs and time.

Corporate formalities: You'll need to document why your S Corp is making these investments, maintain meeting minutes justifying the decisions, and potentially deal with questions about whether these activities serve a legitimate business purpose.

Mixing personal and business: The cleanest S Corp structures have a clear separation between business operations and personal finances. When you start holding investments in the corporation, you blur these lines, making it harder to defend the corporate veil if you're ever challenged.

Distribution complications: Want to pull that Bitcoin back out to sell it personally? That's a distribution that needs to be properly characterized and documented, potentially triggering taxable events and affecting your basis.

Ready to simplify your S Corp? Lettuce automates your entire S Corp experience—from formation and payroll to tax filings and bookkeeping—so you can focus on growing your business, not managing admin. Learn how it works.

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When Investment Holding MIGHT Make Sense (Rarely)

There are limited scenarios where holding investments in an S Corp could be justified:

• Your business genuinely needs short-term reserves in highly liquid investments as part of treasury management.
• You're holding real estate or equipment that's actively used in your business operations.
• You're making strategic investments directly related to your business activities (like buying equity in a supplier or customer).

Notice what's not on this list? Bitcoin, stocks, bonds, or other passive investments held for personal wealth building.

The Better Approach

If you’ve decided that the tax headaches and administrative burdens are not worth the investment, here's what we recommend instead for most solopreneurs:

Keep your S Corp lean and focused. Use it for business operations, receiving revenue, paying business expenses, and paying yourself a reasonable salary. Keep the cash flowing through it; minimal and purposeful.

Invest personally. Open a personal brokerage account, buy your Bitcoin in your own name, and build your investment portfolio outside the corporate structure. You'll have:

• Simpler tax reporting (just a Schedule D)
• No risk to your S Corp status
• More flexibility in investment choices
• Lower overall accounting costs
• Cleaner separation between business and personal finances

Pay yourself and invest the proceeds. Take a reasonable salary from your S Corp, and if there are additional profits, take distributions. Then invest those funds personally. Yes, you'll pay income tax on your salary and distributions, but you were going to pay that anyway—and you'll avoid all the complications above.

For your day-to-day, let Lettuce handle the complexity. We automate your S Corp payroll, taxes, and compliance in one integrated platform, so your business stays lean and focused without the operational burden. Get started today!

The Bottom Line

Your S Corporation is a powerful tool for reducing self-employment taxes and organizing your solopreneur business. But it's not a Swiss Army knife designed to handle every financial need.

Investments belong in your personal accounts where they're taxed simply, managed easily, and don't threaten your corporate status. Keep your S Corp doing what it does best: running your business and saving you money on employment taxes.

If you're already holding investments in your S Corp, talk to your tax advisor about the best way to extract them. And if you're thinking about putting investments into your S Corp, take this as your sign to reconsider.

Your future self will thank you.

S Corp Investment Frequently Asked Questions

Q: Can I legally hold investments like Bitcoin or stocks in my S Corp?

A: Yes, it's technically legal, but it's rarely a good idea. S Corps face strict IRS limits on passive investment income—if more than 25% of your gross receipts come from investments for three consecutive years, you'll automatically lose your S Corp status and face double taxation as a C Corp. The tax complications far outweigh any perceived benefits.

Q: Will holding investments in my S Corp help me save on taxes?

A: No, it typically creates more tax problems than it solves. You'll face complicated basis calculations for every transaction, potential excess passive income taxes, and the constant risk of losing your S Corp status entirely. The tax savings you get from an S Corp come from reducing self-employment taxes on business income, not from holding investments.

Q: What's the best way to handle investments as an S Corp owner?

A: Keep it simple: pay yourself a reasonable salary and distributions from your S Corp, then invest those funds in personal accounts. Open a personal brokerage account for stocks, crypto, or other investments. You'll get simpler tax reporting (just Schedule D), no risk to your S Corp status, and lower accounting costs.

Q: I already have investments in my S Corp. What should I do?

A: Talk to your tax advisor about the cleanest way to extract them through properly documented distributions. The sooner you separate your investments from your business entity, the sooner you'll eliminate the compliance risks and administrative burden. Your advisor can help you avoid triggering unnecessary taxable events during the transfer.

Q: Are there any situations where holding investments in an S Corp makes sense?

A: Very few. The main exceptions are: short-term cash reserves for genuine business treasury management, real estate or equipment actively used in business operations, or strategic investments directly related to your business (like equity in a key supplier). Personal wealth-building investments like stocks, bonds, or crypto should stay in personal accounts.

Q: How does holding investments in my S Corp affect my bookkeeping?

A: It dramatically increases complexity and cost. Every investment transaction—buying, selling, receiving dividends—requires a journal entry in your corporate books. You'll need to meticulously track stock basis adjustments for every trade, maintain corporate meeting minutes justifying investment decisions, and properly document all distributions. This can easily double or triple your bookkeeping expenses.

Author Mark Rose is a seasoned product leader and Head of Product at Lettuce.