Eligibility and Ownership of S Corporations
An S corporation can be owned by any U.S. citizen or resident. The maximum shareholders allowed is 100. Individuals, trusts, estates, and tax-exempt organizations can own an S corporation. Partnerships, corporations, and nonresident aliens cannot be shareholders. Using a trust for ownership can offer tax and legal benefits but can get legally complex.
Tax Benefits and Ownership Requirements
The biggest S corporation advantage is tax-free distributions to shareholders. The strict ownership requirements aim to maintain its tax-saving benefits. For example, if shares are sold to ineligible buyers, S corporation status may be automatically lost.
Shareholder Eligibility and Requirements
- S corps must have no more than 100 shareholders, all of whom must be U.S. citizens or residents.
- S corp shareholders who work for the company must receive reasonable compensation, subject to payroll taxes.
Who Cannot Own Shares in an S Corporation
Non-resident shareholders, C Corporations, LLCs, and certain partnerships are not permitted to be shareholders of S Corporation. A foreigner that is a non-resident alien cannot own an S-Corp. An ITIN isn’t enough to qualify as an S corporation shareholder. S corporations cannot have a nonresident alien as a shareholder.
Shareholder Qualifications for S Corporation
S corporation shareholders must be individuals, specific trusts and estates, or certain tax-exempt organizations (501(c)(3)). Partnerships, corporations, and nonresident aliens cannot qualify as eligible shareholders.
Taxation and Operation of S Corporations
An S corporation is a pass-through entity—income and losses pass through the corporation to the owners’ personal tax returns. The S Corp advantage is that you only pay FICA payroll tax on your employment wages.
Estate Planning and Shareholder Rights
If an individual owns stock in an S corp, the estate can maintain ownership of his or her stock after death. Although an S corporation is limited to 100 shareholders, members of the same family are treated as a single shareholder.
Election and Taxation as an S Corporation
An S Corporation (S Corp) is created through election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. The tax status does not change the operations of the business, but it means that the corporation will not pay federal income tax; rather, the tax burden will be passed on to shareholders.