Updated November 4, 2020:

Who Can Own a Business?

Can a partnership own an S corporation? This is not legally allowed; an S corporation also cannot be owned by a corporation or by a non-resident alien. Only U.S. citizens and residents and certain estates and trusts can be shareholders in an S corporation or members of a limited liability company (LLC) that opts for S corporation taxation.

Other restrictions on ownership for different business entities are as follows:

  • Non-U.S. citizens can own a business in the U.S. if they have a green card or an E-1 or E-2 visa. However, these individuals cannot own shares in an S corporation.
  • An individual taxpayer identification number (ITIN) does not necessarily qualify an individual to own a business.
  • Children are not federally restricted from business ownership, but the decision-makers must be older than age 18 in most states. Business owners should consider the implications of having a child involved in a business situation. For example, a contract signed by a minor is not legally binding, so a child should not be the sole owner of a business. 
  • A business can usually own another business; this most commonly occurs when one business purchases another as a subsidiary. However, both S corporations and LLCs taxed as S corps must abide by the ownership regulations described above.
  • An estate can invest as a shareholder or partner in a business or as a limited partner in a partnership. For the purposes of this guideline, an estate is defined as the assets owned by an individual, which can be held in a trust that manages its assets. An estate can also invest in real estate.

S Corporation Ownership: LLCs and Limited Partnerships 

The legal restrictions of S corp ownership do not address whether an LLC or limited partnership (LP) can own shares in an S corp. For this reason, you could assume that a corporation's S election would be invalidated if it sold shares of stock to an LP or LLC. However, a recent letter ruling that single-owner LLCs and LPs can purchase S corporation stock without termination of that business's S corp tax status.

In this ruling, three shareholders in an S corporation each planned to transfer their S corporation stock to an LLC and then contribute the LLC stock to purchase an interest in a limited partnership. After this transfer, the LP would be completely owned by the shareholders and the LLC. Then, the shareholders opt for pass-through taxation, the default for an LLC. Because this type of LLC is a disregarded entity, as a single-owner LLC it qualifies to own S corp stock without invalidating S corp taxation.

Although the letter does not detail why the shareholders structured their business in this way, it was likely to limit liability while retaining tax benefits. This ruling may be useful for single owners of an LLC who want to purchase S corporation stock.

S Corporation Ownership Limits

The IRS has established specific limits for the individuals and entities that can own shares in an S corporation. These fall into several categories as follows:

  • Function:  The reason for shareholder limitations is related to the way that S corporations are taxed. These entities are subject to pass-through taxation, in which owners report business profits and losses on their individual tax return, thus avoiding the double taxation that is imposed on corporations.
  • Types: Types of allowable S corp shareholders include individuals, trusts with individuals as beneficiaries, and estates of deceased individuals that have gone through probate. Business trusts can not purchase or own S corp shares.
  • Limitations: Corporations may not own shares in an S corp, nor can non-resident aliens or partnerships. There are no exceptions to these limits.
  • Warning: The S corporation election will be nullified if shares are sold to any disallowed entity, such as another corporation or a partnership. This will subject your business to double taxation and prevents you from electing S corp treatment in the future.
  • Expert Assistance: Businesses should consider hiring a qualified corporate attorney to make sure they are in accordance with all IRS regulations, rules, and procedures.

If you need help determining whether a partnership, S corporation, or other types of business entity is best for your business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.