Key Takeaways

  • S corporations cannot have nonresident alien shareholders without losing their S corp status.
  • Resident aliens can own shares in an S corp, but they must meet specific IRS criteria.
  • Nonresident aliens may invest indirectly through an Electing Small Business Trust (ESBT), a special trust structure that permits S corp stock ownership under strict conditions.
  • If an S corp unintentionally allows a nonresident alien to become a shareholder, its S corp election will be terminated.
  • The IRS uses the substantial presence test and green card test to determine residency for tax purposes.

Is an S corporation non resident alien owner possible? Owners in S corporations are called shareholders. For a corporation to maintain its S corp status, it cannot have nonresident alien shareholders.

Can Foreigners Own S Corporations?

It's important to understand the distinction in what constitutes a “foreigner” when it comes to S corp ownership. The IRS states that for a business to qualify for S corp status, it has to meet certain requirements. One of those is not having nonresident aliens as shareholders.

However, not everyone knows the difference between the general term “foreigner” and nonresident alien. Under the tax code, an S corp may have a non-citizen, resident alien as a shareholder. However, it cannot have a nonresident alien as a shareholder.

There are many non-citizens who own U.S. companies. Technically, they are foreigners to the country. If they want their business to be taxed as an S corp for tax purposes, they'll file for the election. The key question that comes up is whether they're a resident alien or nonresident alien.

Nonresident aliens are not resident aliens or citizens. Resident aliens, on the other hand, meet one of the following criteria:

  • They meet the “substantial presence test.”
  • They're legal, permanent residents.
  • They meet the “first-year election” requirements.

Understanding the Difference Between Resident and Nonresident Aliens

The IRS makes a crucial distinction between resident aliens and nonresident aliens for the purpose of S corp eligibility. A resident alien can be a shareholder if they meet either:

  • The Green Card Test: they are a lawful permanent resident of the U.S.
  • The Substantial Presence Test: they are physically present in the U.S. for a specified minimum number of days across a three-year period.

In contrast, nonresident aliens do not meet these tests, and their ownership in an S corp—even inadvertently—can invalidate the company’s S corp election. Foreign entrepreneurs who live and work in the U.S. legally may still qualify as resident aliens and thus be eligible shareholders, despite being foreign nationals.

S Corps and Foreign Shareholders

Small businesses that elect S corp status have shareholders who have all consented to this election. In general, small business corporations meet the following criteria:

  • They have 100 or fewer shareholders.
  • Only individuals serve as shareholders (with certain narrow exceptions).
  • They issue one class of stock.
  • They have no nonresident aliens as shareholders.

If the corporation fails to meet any of the criteria, the IRS can immediately terminate its S corp status. For the S corp's shareholders, such a termination can have disastrous tax consequences.

To maintain the S corp status, the shareholders must make sure they meet all requirements. However, they may have little control over an existing shareholder who doesn't maintain his or her resident alien status for unforeseen reasons.

The IRS considers someone a nonresident alien if the person is neither a U.S. resident or citizen. Resident aliens have either met the “substantial presence” test or have been legally and permanently admitted to the U.S. The substantial presence test requires a person to meet the following guidelines:

  • He or she has physically lived in the country for a minimum of 31 days during the year.
  • He or she has lived in the U.S. for at least 183 days during a three-year period, including that calendar year.

Some individuals are exempt, however, even if they're physically present in the U.S. This includes people who are temporarily in the country, such as the following:

  • Teachers
  • Trainees
  • Diplomats
  • Students

Because of the strict requirements for S corps, they should be careful about selling any shares to an individual who would qualify as exempt, according to the IRS.

While it's not illegal for nonresident aliens to be shareholders in S corps, it can lead to the corporation losing its S corp status. The corporation may also lose this status if an alien shareholder doesn't meet the substantial presence guidelines for a particular year or if he or she doesn't have a green card.

If alien shareholders can't be physically present in the U.S. for at least 31 days of the year due to an unexpected event — such as an illness — the IRS may terminate the corporation's S corp status. This would cause all of the company's shareholders to suffer negative tax consequences. It's advisable for S corporations to carefully consider allowing foreigners to purchase stock in their companies. The more foreign shareholders an S corp has, the higher the potential risks.

The term "foreigner" doesn't always have the same meaning, especially when looking into complicated areas like business ownership. There are many people who own businesses in the U.S. who are foreigners, but they may run corporations or other types of companies.

If you're interested in maintaining your S corp status, it's important to understand all of the requirements. Otherwise, you run the risk of losing this status, which can severely impact your company's owners.

Indirect Ownership: Electing Small Business Trusts (ESBTs)

Although nonresident aliens cannot directly hold shares in an S corp, there is a potential workaround: Electing Small Business Trusts (ESBTs). Under the Tax Cuts and Jobs Act (TCJA), nonresident aliens may be beneficiaries of an ESBT that owns S corporation stock. This allows indirect ownership without violating S corp eligibility rules.

Key ESBT facts:

  • The trust itself—not the individual beneficiary—is treated as the shareholder.
  • The trust must file IRS Form 2553 and elect ESBT status.
  • ESBTs are subject to separate tax rules and higher tax rates, but preserve the corporation’s S election.

This structure allows foreign investors to participate economically in an S corporation while preserving the legal and tax status of the company​.

Consequences of Noncompliance with Shareholder Rules

If a nonresident alien becomes a shareholder—either through direct transfer or failure to maintain residency status—the S corporation risks immediate termination of its S election. This termination can lead to significant tax consequences, such as:

  • The corporation becoming taxed as a C corporation, subject to double taxation.
  • Retroactive tax liabilities from the date of the disqualifying event.
  • Disruption in distributions and shareholder tax filings.

To prevent such issues, businesses should:

  • Conduct shareholder eligibility reviews regularly.
  • Include eligibility clauses in shareholder agreements.
  • Consult

Common Mistakes with S Corp Foreign Shareholders

Entrepreneurs sometimes unintentionally jeopardize their S corp status by:

  • Assuming all foreign residents are eligible shareholders.
  • Failing to monitor immigration status changes of shareholders.
  • Not understanding the residency status of a trust beneficiary.
  • Overlooking ESBT election requirements.

These errors can often be avoided through proper legal and tax planning, making it essential for businesses to seek guidance before onboarding foreign investors.

Frequently Asked Questions

  • Can a nonresident alien be a shareholder in an S corp?
    No. Nonresident aliens cannot directly own shares in an S corporation.
  • Can foreign citizens own an S corp if they live in the U.S.?
    Yes, if they are classified as resident aliens under IRS rules, they can own S corp shares.
  • What happens if a nonresident alien becomes a shareholder?
    The corporation’s S election may be terminated, resulting in C corp taxation and possible penalties.
  • Can a nonresident alien own shares through a trust?
    Yes, through an Electing Small Business Trust (ESBT), which allows indirect ownership.
  • What is the substantial presence test?
    It’s an IRS test used to determine residency based on physical presence in the U.S. over a three-year period, including at least 31 days in the current year and 183 days total across the last three years.

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