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. Back to list of frequently asked questions
Additional Information You May Find Useful
If you want additional information about how to maximize the tax savings related to running a business or investment venture, you may also be interested in one of my downloadable e-books (see descriptions below). Each book covers a category of tax planning topics that easily save a business owner significant amounts of income or self-employment taxes (potentially thousands of dollars a year) and is instantly downloadable.
One of the most powerful tactics for saving small business taxes is maximizing your deductions. You can literally save thousands in taxes each year.Read More
Using an S corporation for your business? To maximize savings, you need to minimize the salary paid to shareholders. But this decision is tricky.Read More
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