S Corporation Non Resident Alien
Is an S corporation non resident alien owner possible? Owners in S corporations are called shareholders.3 min read
2. S Corps and Foreign Shareholders
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.
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:
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.
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