1. About S Corporations
2. S Corporation Shareholders
3. Exceptions to the 100 Shareholder Rule 
4. S Corporations and Institutional Shareholders
5. Characteristics of S Corporation Stock

How many shareholders can an s corporation have? An S Corporation can have 1 to 100 shareholders. The only way an S corporation can have more than 100 shareholders is when some of the shareholders are family members. This is because family members can be treated as one person. With the exception of single-member S corporations and some trusts, all the shareholders of an S corporation must be individuals.

About S Corporations

The S corporation taxation type is an arrangement explained in Subchapter S of the Internal Revenue Code. A corporation or LLC can be given S corporation tax treatment by the IRS if the business files IRS Form 2553. Businesses that file for S corporation treatment anticipate some benefits as a result of S corporation tax treatment. 

Unlike the traditional C corporations, S corporations do not pay IRS corporate tax. Individual shareholders of S corporations must file and pay income tax on their share of the corporation's profits, just like C corporation shareholders. S corporation shareholders file returns using Schedule K-1 on IRS Form 1040. 

S Corporation Shareholders

The law lists a number of requirements for S corp treatment. Most of these requirements focus on shareholder eligibility.

  • The law states that an S corporation can have a maximum of 100 shareholders.
  • There is no minimum number of shareholders.
  • All the shareholders should be U.S. citizens.
  • S corp shareholders who are not U.S. citizens must be U.S. residents.

Exceptions to the 100 Shareholder Rule 

S Corporation that desire to have more than 100 shareholders can legally sidestep the 100 shareholder limitation in the following situations:

  • Family Members
    S corporations can treat family members as one shareholder. The law is generous with its definition of a family member. Spouses, uncles, aunts, children, grandparents, grandchildren, first cousins, and even ex-spouses count as members of the same family.
  • S Corporation Business Partners
    An S corporation can be a partner in a partnership or a shareholder in a C corporation. This can enable the business partners of an S corporation to have a measure of control on the financial affairs of an S corporation. Some S corporations have used this provision to indirectly increase the number of their shareholders. 

S Corporations and Institutional Shareholders

The law prohibits most entities from being shareholders in an S corporation. The following entity types are specifically prohibited from having shares in an S corporation:

  • Business trusts
  • C corporations
  • Limited partnerships
  • Multi-member S corporations
  • Individual retirement accounts

There are specific scenarios in which the S corporation can be allowed to have some non-individual shareholders:

  • Estates of Deceased Shareholders
    The death of a shareholder and subsequent transfer of his shares to an estate does not necessarily doom the corporation. The law allows for the estate of the deceased shareholder to hold the shares until the completion of the probate process.
  • Bankruptcy Estates
    An S corporation can continue functioning legally if a shareholder files for bankruptcy and his shares are transferred to a bankruptcy estate.
  • Single-member S corporations
    A single-member S corporation can be a shareholder in another S corporation. In this case, the IRS does not differentiate the single-member S corporation from its owner.

Characteristics of S Corporation Stock

Classes of Stock

An S corporation is allowed to have only one class of stock. Different shareholders with the same number of shares should have identical rights during distribution or liquidation. In other words, S corporation distributions are based exclusively on the percentage of shares a person has. S corporation stock laws are different from those of partnerships and C corporations, which can come up with different criteria for distribution.

Stock Transfer

Unlike other small businesses, S corporation shareholders are allowed to transfer their stock to another person without seeking the consent of the other shareholders.

Court Action

Shares of an S corporation shareholder can be seized and transferred by a court.

Penalties for Breaking S Corporation Shareholder Requirements 

S corporations that accidentally or otherwise break the rules on the number and type of shareholders face revocation of S corporation status by the IRS. The revocation automatically means that the business has to wait five years to be considered for S corporation treatment again. The IRS can also demand that the business pays taxes for the past three years at C corporation rates.

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