Who Can Own an S Corp and Who Can’t

Key Takeaways

• Only U.S. citizens and resident individuals can own shares in an S corp.
• S corporations are limited to 100 shareholders (some family members can count as one).
• Certain trusts and entities—like Qualified Subchapter S Trusts (QSSTs), Electing Small Business Trusts (ESBTs), and some nonprofits—may qualify as shareholders.
• Foreign individuals, partnerships, C corps, and IRAs cannot own an S corp.
• Violating ownership rules can terminate S corp status.
• Married couples may be treated as one shareholder for S corp purposes under certain conditions.
• Special rules apply to community property states and inadvertent termination.

Who can own an s corp? An S corp can be owned by any U.S. citizen or U.S. resident. The law requires all owners to be individuals and caps the maximum number of owners at 100. Trusts, LLCs, partnerships, C corporations, and S corporations cannot own an S corp. A shareholder can sell his share of an S corporation without getting the consent of other members.

Owning an S Corporation: Who Is Eligible?

The S corporation entity type is a federal taxation type that can be granted to certain corporations and LLCs. S corporation treatment gives the corporation pass-through status, enabling the corporation to not pay federal corporate tax. Because of its potential tax saving benefits, S corporation status is coveted by many corporations. The IRS has laws governing the ownership of S corporations and is very strict when enforcing them. Corporations must meet these requirements before applying for S corp treatment. Should the treatment be granted, the corporation must continue conforming to those requirements.

C corporations can choose to file as S corporations by holding a unanimous shareholders vote. They can then communicate their decision to file as an S corporation to the IRS using Form 2553, also called Election by a Small Business Corporation. The corporation must file for S corp treatment in the first three months and 15 days of its tax year for S corp treatment to take effect in that year.

Individuals Owners of S Corporations

S corporation treatment was envisioned to primarily benefit individual owners. Not all individuals are eligible to be S corp owners, however. S corporation treatment is only available to the following types of individuals:

• U.S. citizens
• U.S. noncitizens who are residents of the U.S. 

The owners of the S corporation should be between one and 100, but family members can count as one member. 

All other people who are neither U.S. citizens nor U.S. residents cannot be shareholders in an S corporation.

Spouses, Community Property, and Family Member Shareholding Rules

The IRS has special rules for married couples and families when determining the shareholder count for an S corporation. In general:

• Married couples who live in community property states may be treated as a single shareholder if they file jointly, even if both are considered to own the shares.
• Family members, such as a parent and child or siblings, may also be treated as one shareholder for the 100-shareholder limit if the family group qualifies under IRS aggregation rules.

These provisions are designed to allow small, family-run businesses to elect S corporation status without exceeding the shareholder threshold.

S Corporation Stock

Unlike C corporations, which can have both preferred and common stock, the stock of all the shareholders of an S corporation must be of the same type. The S corporation can have nonvoting shareholders, but during distribution, a shareholder's number of share is the only method that can be used to determine his income. This is different from most other entity types, which can come up with alternative criteria for profit distribution. These requirements, which are unique to S corporations, can prove to be an impediment to a corporation's efforts to sell stock and raise funds for growth.

Entities That Can Hold Stock in an S Corporation

Although the law prohibits most business entities from being owners of S corporations, there are a few entity types that can hold stock. In most of these cases, these entities are either owned by a single person or family, an estate of a deceased shareholder, or a bankruptcy estate of a shareholder who has filed for bankruptcy. The following are entities that can be shareholders of an S corporation:

• A single-member S corporation whose owner is a U.S. resident or U.S. permanent resident can be a shareholder of an S corporation. In this case, the IRS ignores the corporation and considers the member as the shareholder.
• A Qualified Subchapter S Trust (QSST) can also be a shareholder in an S corp. The trust should vote to become a QSST either within two months of the first tax year of S corp treatment or within two months of becoming a shareholder in the S corporation.
• Some Electing Small Business Trusts (ESBT) are also eligible. The trust must elect to become an ESBT either within two months of the business becoming an S corporation or within two months of the trust becoming a shareholder in the S corporation.
• Some grantor or living trusts.
• Some voting trusts.
• Some nonprofits and other tax-exempt organizations.
• Some irrevocable trusts.
• Testamentary trusts.

Qualified Trust Types That Can Hold S Corp Stock

In addition to QSSTs and ESBTs, several other trusts may qualify to own S corporation shares, provided they meet specific IRS requirements:

• Grantor trusts (where the grantor is treated as the owner for tax purposes) are eligible if the grantor is a U.S. citizen or resident.
• Testamentary trusts, which are created upon the death of an individual, may hold S corp shares for up to two years after death.
• Voting trusts, established to manage voting rights, may qualify if all beneficiaries are eligible S corp shareholders.
• Certain irrevocable trusts may be allowed if they elect ESBT status and follow IRS election procedures.

Each trust must file timely elections (generally within two months and 15 days after receiving the stock) to maintain S corp compliance.

Entity Types That Cannot Be S Corporation Owners

Some corporations are expressly prohibited from being shareholders of an S corporation. These are the following:

• C corporations
• Partnerships
• Multiple-member LLCs
• Limited liability partnerships
• Individual retirement accounts
• Foreign trusts
• Business trusts

S corporation tax treatment is a very popular entity type because it enables corporations to avoid double taxation by the IRS. S corporation treatment is only available to small businesses which have no more than 100 U.S. citizen or U.S. resident shareholders. Some nonprofits, trusts, and single-member LLCs can also own an S corporation.

Ownership Restrictions and Inadvertent Termination

S corporation ownership restrictions are strictly enforced by the IRS. If an ineligible shareholder—such as a non-resident alien, partnership, or C corporation—acquires shares in an S corp, the corporation can lose its S election status. This termination generally becomes effective on the date the disqualifying shareholder acquires stock.

However, the IRS may allow the corporation to retain its S status if the disqualification was inadvertent. To qualify for this relief, the corporation must act quickly to remedy the issue (such as removing the ineligible shareholder) and demonstrate that the violation was not intentional. This process involves submitting a request for a private letter ruling or following IRS procedures under Revenue Procedure 2013-30.

Corporations are encouraged to regularly monitor shareholder eligibility to avoid unintended terminations.

Frequently Asked Questions

1. Can a non-U.S. citizen own an S corporation?
   No, only U.S. citizens and U.S. resident aliens can be shareholders of an S corp.
2. Can a C corporation own shares in an S corp?
   No, C corporations are not permitted to own S corporation stock.
3. How does the IRS treat married couples for S corp ownership?
   Married couples may be counted as one shareholder if they reside in a community property state and file jointly.
4. What happens if an ineligible shareholder acquires S corp stock?
   The S election may be terminated, but the IRS may grant relief if the violation was inadvertent and promptly corrected.
5. Can a trust own an S corporation?
   Yes, but only specific types of trusts like QSSTs, ESBTs, and grantor trusts that meet IRS requirements.

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