Having your cake and eating it too: avoiding the S corporation single class of stock rule while granting stock-like incentive compensation

For many businesses, maintaining their election to be taxed as Subchapter S corporations is important. This is because S corporations enjoy all of the legal benefits of being incorporated (prime among them being limited legal liability for shareholder-investors) while avoiding a major tax cost of being incorporated: the specter of double taxation. Maintaining the election also is important because losing the election unexpectedly may trigger double taxation, and do so retroactively. How to keep S status -- which prohibits more than one class of stock-- while granting stock incentives to motivate employees -- which incentives can look like second classes of stock -- thus is an important tax planning puzzle.