S corp ownership rules require that a corporation must meet specific criteria to be eligible and that the notification of the choice to be taxed as an S corporation be submitted in a certain timeframe to the Internal Revenue Service (IRS).

S Corporation Ownership Rules

Number of Owners

  • A maximum of 100 shareholders is allowed in an S corporation.
  • Family members may be counted as one shareholder. Family members are considered descendants of an ancestor.
  • This includes up to six generations as of the date of election application for S corporation status. This also includes descendants and spouses.

Eligible Owners

  • An S corporation can only be comprised of eligible U.S. citizens and U.S. residents.
  • Non-resident aliens are not permitted to be shareholders in an S corporation.
  • S corporations are also limited to the types of entities allowed to own shares. Certain trusts and estates can hold S corporation shares while partnerships and other corporations may not hold S corp shares. ;
  • Trusts with individual beneficiaries are allowed to own S corporation shares. Business trusts are not permitted to be shareholders.
  • Estates of deceased shareholders of an S corporation can maintain ownership through probate.
  • Tax-exempt nonprofits are also eligible to become shareholders.
  • There are no exceptions to non-resident aliens and partnerships when it comes to not being permitted to own S corp stock.


  • If at any time S corporation shares are issued to an entity that is deemed prohibited, such as another corporation, the Internal Revenue Service will declare the S corporation election as being null and void.
  • If the S corporation status is revoked, the income will be taxed at the corporate level and again at the shareholder level.
  • The S corporation election is designed to avoid double taxation as enforced by the IRS.

Expert Assistance

  • An S corporation must be in compliance with the Internal Revenue Code and its rules and regulations, which can result in complex legal issues.
  • It is recommended that owners consult with a qualified attorney knowledgeable in business organization and management.

Effects of Violation

  • The penalty for selling even one share to an ineligible owner will result in the S corporation election being revoked because the company is no longer operating as a small-business entity.
  • There is a five-year waiting period once the S corp election is lost and the company is allowed to elect S corporation status again.

One Class of Stock

  • An S corporation can have only one class of stock. For example, an S corporation cannot have shares paying a dividend or shares that get the first rights in a liquidation.
  • Voting rights are an exception. The S corporation rules are not violated if some shares have voting rights and others do not. In other words, as an example, a shareholder may transfer some of the shares to children while retaining shares with voting rights.


  • With an S corporation election, taxes are not assessed against the business at the corporate level by the IRS.
  • Shareholders of an S corporation report what is referred to as "flow-through" income and losses on individual personal tax returns.

Information About Forming an S Corporation

Basically, to form an S corporation a document is filed that creates an independent legal entity that operates on its own. The entity has a name, a specific purpose for the business, and a tax identification number with the IRS making it an active corporation. As such, the corporation is responsible for the operations/activities of the business. By doing so, the owners (shareholders) are protected.

The liability of an owner is limited to their initial investment to start the corporation. This does not include personal assets.

Depending upon the state law where the business is being incorporated, one or more than one person may serve as directors and officers.

The initial paperwork filed by the corporation is its articles of incorporation. The articles include the company's name, the names of the board of directors, the authorized number of shares, and other items.

The incorporator signs the articles of incorporation. This may be an individual involved in the S corporation. Often, it is the company's designated attorney.

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