Who can be an S corporation shareholder?

I've danced around this topic a few places on this web site because it becomes pretty complicated. But here's a bit more detail on who can and can't be an S corporation shareholder...

The tax laws identify the following persons as eligible S corporation shareholders: U.S. citizens and permanent residents, qualified subchapter S trusts, some voting trusts, testamentary trusts created by a will, grantor trusts, revocable trusts created as part of an estate, and certain exempt organizations.

In some cases, I'll note here, an S corporation can also own an S corporation. (The subsidiary S corporation needs to be something called a Qualified Subchapter S corporation, or QSUB, as I talk about in another question-and-answer discussion.)

By process of elimination, the preceding discussion means that the following taxpayers are ineligible S corporation shareholders: nonresident aliens, C corporations, partnerships, and foreign trusts.

A related point: The laws limit the number of shareholders in an S corporation to 100 shareholders or less. So, you also aren't eligible as a shareholder if there are already 100 shareholders. You can't, in other words, be the 101st shareholder. However, the 100-shareholders-or-less rule is relaxed in the case of families. The members of a family can be treated as a single shareholder. The members of such a "family" shareholder include the common ancestor (grandpa or grandma), the next generation (including spouses and ex-spouses), and the lineal descendents (the grandkids).

And one final qualification that's important because some people get confused about this. While a partnership can't own shares in an S corporation, an S corporation can own an interest in a partnership. Similarly, while a C corporation can't own shares in an S corporation, an S corporation can own shares in a C corporation.

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