Key Takeaways

  • An S corporation can have up to 100 shareholders under IRS rules.
  • Family members (including extended relatives and ex-spouses) may be counted as a single shareholder to help stay within this limit.
  • Only U.S. citizens or resident aliens, estates, certain trusts, and single-member S corporations may hold shares.
  • Non-qualifying entities like C corporations, partnerships, and IRAs generally cannot be S corporation shareholders.
  • Violating shareholder rules may lead to revocation of S corp status and result in back taxes and penalties.

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.

Who Can Be an S Corporation Shareholder?

To qualify for S corporation status, shareholders must meet strict eligibility requirements. Permitted shareholders include:

  • Individuals who are U.S. citizens or resident aliens
  • Certain types of trusts (such as grantor trusts and qualified subchapter S trusts, or QSSTs)
  • Estates of deceased shareholders
  • Single-member S corporations (in limited scenarios)

Entities not allowed to own shares in an S corporation include:

  • Partnerships
  • Multi-member LLCs taxed as partnerships
  • C corporations
  • Foreign investors (nonresident aliens)
  • Most business trusts
  • IRAs (except in specific cases like certain bank shares)

Meeting these ownership criteria is crucial to maintain S corporation tax status and avoid disqualification by the IRS.

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. 

How Family Members Are Counted as One Shareholder

The IRS allows certain family members to be treated as a single shareholder for the purpose of the 100-shareholder limit. This rule helps family-owned businesses maintain S corporation eligibility even if they have more than 100 related investors.

Family members counted as one shareholder may include:

  • Spouses (current and former)
  • Children, grandchildren, and great-grandchildren
  • Parents, grandparents, and great-grandparents
  • Siblings (brothers and sisters)
  • Aunts, uncles, nieces, and nephews
  • First cousins

This aggregation applies only for the shareholder count and does not affect each family member’s individual ownership rights or tax reporting obligations.

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.

Impact of Shareholder Changes on S Corporation Status

S corporation eligibility can be jeopardized if the shareholder makeup changes in a way that violates IRS rules. Common scenarios that risk losing S corp status include:

  • Adding an ineligible shareholder (like a nonresident alien or a C corporation)
  • Exceeding the 100-shareholder limit without qualifying family aggregation
  • Failure to update IRS records after shareholder changes

If an S corporation unintentionally violates these rules, the IRS may provide relief through a late election relief or inadvertent termination request, but the corporation must act promptly to correct the issue.

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.

Frequently Asked Questions

  1. How many shareholders can an S corporation have?
    An S corporation can have up to 100 shareholders. Certain family members may be treated as one shareholder, which allows some S corps to have more than 100 individuals involved.
  2. Can an S corporation have foreign shareholders?
    No, S corporation shareholders must be U.S. citizens or resident aliens. Nonresident aliens are not permitted to own shares in an S corporation.
  3. What happens if an S corporation exceeds the 100-shareholder limit?
    Exceeding the limit without qualifying exceptions may result in loss of S corporation status, leading to corporate taxation under C corporation rules and potential IRS penalties.
  4. Can a trust own shares in an S corporation?
    Yes, but only certain types of trusts, such as grantor trusts, QSSTs, and ESBTs (electing small business trusts), are allowed to be shareholders in an S corporation.
  5. Can an S corporation have shareholders who are other corporations or partnerships?
    Generally, no. C corporations, partnerships, and multi-member LLCs taxed as partnerships cannot be shareholders in an S corporation, with few exceptions such as a single-member S corporation being treated as an individual owner.

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