Who Can Be a Shareholder? Everything You Need to Know
Who can be a shareholder? Almost anyone can become a shareholder in a C-corporation which is very different from an S-corporation.3 min read
2. Rights of a Shareholder
3. Who Can Be a C-Corporation Shareholder?
4. Who Can Be a Shareholder in an S-Corporation?
5. Who Can't Be an S-Corporation Shareholder?
Who can be a shareholder? Almost anyone can become a shareholder in a C-corporation. However, an S-corporation can only have U.S. citizens, U.S. residents, and certain trusts, LLCs, estates, and organizations as its shareholders.
Who Is a Shareholder?
Anyone who owns shares in a company is called a shareholder or a stockholder of the company. A shareholder can be a person, institution, or another company. Shareholders are the owners of a company. If the company does well, the shareholders benefit through appreciation in the value of their shares. However, if the company incurs losses, the shareholders can also be at a loss due to fall in stock prices.
Unlike in partnership and sole proprietorship businesses, shareholders aren't responsible for debts and obligations of the company. If the company cannot meet its debts, creditors cannot pursue personal assets of shareholders.
Shareholders do not directly manage the operations of a company. Instead, they appoint a board of directors to govern the business operations.
Rights of a Shareholder
Shareholders' rights are defined in the company's bylaws and corporate governance policy. Usually, a shareholder enjoys the following rights:
- To inspect and approve company books and records
- To seek legal remedy against misdeeds and negligence of directors and officers of the company
- To vote on major business decisions, such as the election of directors and approval of proposed mergers or acquisitions
- To have a share in the assets of the company in case of liquidation (after paying off creditors and bondholders)
- To receive dividends on shares (whenever the company decides to distribute its earnings)
- To attend annual company meetings
- To vote via mail or by proxy if they can't attend a meeting in person
Who Can Be a C-Corporation Shareholder?
The IRS classifies C-corporations as a distinct taxation entity different from their owners. A C-corporation can have its own name and issue different classes of shares, including general and preferred shares.
Shareholders of a C-corporation need not be citizens or residents of the United States. In fact, there is no restriction from the IRS on the type of entity that can own shares in a C-corporation.
Who Can Be a Shareholder in an S-Corporation?
According to tax law, the following persons can become shareholders in an S-corporation:
- Citizens of the United States
- Permanent U.S. residents
- LLCs owned by a single member who is a citizen or resident of the United States
- Certain S-corporation trusts
- Certain voting trusts
- Testamentary trusts that are created by a will
- Grantor trusts
- Revocable trusts that are created as part of an estate
- Bankruptcy estates
- Certain exempt organizations
First, you must be a U.S. citizen and permanent U.S. resident to become an S-corporation shareholder. The income of an S-corporation passes through the personal tax return of individual shareholders.
Second, certain trusts and single-member LLCs can own shares in an S-corporation, but they aren't involved from a taxation point of view.
Third, certain estates are allowed to become members of an S-corporation so that the company doesn't lose its S-corporation status merely because of a member's death or bankruptcy. For example, if an existing S-corporation shareholder dies and their shares go into an estate or a member becomes bankrupt and their shares go into a bankruptcy estate, the S-corporation status of the company remains intact.
Lastly, an S-corporation can own another S-corporation. For this, the subsidiary S-corporation must be a QSUB or a qualified subchapter S-corporation.
Who Can't Be an S-Corporation Shareholder?
By process of elimination, the following persons and entities can't become shareholders of an S corporation:
- Nonresident aliens (individuals who are neither citizens of nor residents in the United States)
- Partnership firms
- Multi-member LLCs (the IRS treats them as general partnerships)
- Limited liability partnerships
- Foreign trusts
- Individual retirement accounts
Moreover, an S-corporation can't have more than 100 shareholders. Thus, if an S-corporation already has 100 shareholders, everyone else automatically becomes ineligible to become shareholders. However, for the purpose of a 100-shareholder limit, all members of a family are treated as a single shareholder. Family members can include:
- Common ancestors, such as grandparents
- The following generation, like spouses and ex-spouses
- Lineal descendants, such as grandkids
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