S Corp Requirements: Who Can Own One, Non-Residents and Visas

S corp requirements: which tests must the corporation pass?

A corporation is an S corporation only while it passes all five tests below, on every day of every S year. Failing one, even for a day, ends the election from that day (section 1361(b); section 1362(d)(2)).

The Form 2553 instructions add two conditions for making the election: a permitted tax year, and a signed consent from every shareholder.

The tests are usually simple when every owner and every owner's spouse is a US citizen or resident, each owner holds shares in their own name, and all shares carry the same rights. They need a careful check before electing, and before any share changes hands, when an owner holds a visa or green card or plans to leave the US, a spouse lives abroad, a trust or another company will hold shares, or an investor wants different terms. An election that ends is hard to undo: the corporation becomes a C corporation, and without IRS consent a new election waits until its fifth tax year after the first tax year in which termination took effect (Form 1120-S instructions).

Gather each owner's passport, green card or visa with dates, US days for the current and two prior years, each spouse's residency and home state, the share ledger, the articles, bylaws and any shareholder agreement, and the filed Form 2553 with the IRS acceptance letter.

Can a non-resident alien own an S corp?

No. An S corporation cannot have a nonresident alien as a shareholder (section 1361(b)(1)(C)). The test is US tax residency, not citizenship: a nonresident alien is a person who is neither a US citizen nor a US resident (section 7701(b)(1)(B)).

A non-US citizen can therefore own S shares only while a US tax resident, usually under the green card test or the substantial presence test. An owner abroad who is not a US resident cannot hold S shares unless treated as one, for example through the spouse choice described below; the LLC and C corporation routes are compared in forming and running a company from abroad.

Can a non-US citizen with an H-1B, F-1 (OPT) or green card be an S corp shareholder?

A green card holder can. An H-1B holder usually can once resident by day count. An F-1 student, including one on practical training (OPT), usually cannot during the first five calendar years in the US. Publication 519 sets the tests.

Meeting the day count is not always enough: someone in the US fewer than 183 days in the year who keeps a tax home in, and a closer connection to, another country, has not applied for a green card and files Form 8840 is a nonresident alien for that year (Publication 519).

The IRS says students in F-1, J-1 or M-1 status for fewer than five calendar years are generally nonresident aliens, and it treats practical training as student employment in that status (IRS: foreign students).

The arrival year needs care. An H-1B holder who meets the test is generally resident from the first day present that year, and a nonresident alien before it (Publication 519). Days as an exempt student do not count as days present (section 7701(b)(3)(D)), so in the year a student switches to H-1B the count starts on the first H-1B day, and a switch in the second half of the year usually leaves too few days to be resident that year; see first year as a US tax resident. Shares held before the residency starting date were held by a nonresident alien, so a company the person already owned generally cannot be an S corporation for that year (section 1362(b)(2)).

A treaty claim is a trap. A US resident, including a green card holder, who also counts as a resident of another country such as China or Canada can claim under the treaty's tie-breaker rule to be taxed as that country's resident, filing Form 1040-NR with Form 8833. That person is then a nonresident alien in figuring US tax, and a resident for other purposes (Publication 519). For a green card holder the statute settles it: one who starts being treated as the other country's resident under the treaty, does not waive the treaty benefits and notifies the IRS stops being treated as a lawful permanent resident (section 7701(b)(6)). Unless the day count still makes that person resident, the claim makes them a nonresident alien and ends the election, and for a long-term green card holder it can trigger the expatriation tax (Publication 519). For a resident by day count, both the S corporation regulations and the residency regulations reserve a rule for this case and leave it blank (26 CFR 1.1361-1(g)(2); 26 CFR 301.7701(b)-7(a)(4)), so whether the claim ends the election is unsettled. A shareholder thinking of a treaty claim has that question to settle before filing it.

Tax residency decides S eligibility only. Whether a visa lets the holder work for, manage or be paid by the company is an immigration question this page does not answer; for the tax side of founding on a visa, see starting an LLC on a visa.

What if a shareholder moves abroad, or a spouse is a nonresident alien?

A US citizen stays eligible anywhere, but a nonresident alien spouse with an interest in the shares can still end the election. A non-citizen shareholder who becomes a nonresident alien ends it on the first day of nonresident status.

The shareholder moves abroad. Under Publication 519, residency ends on the residency termination date:

• By default, December 31 of the departure year.
• Earlier, on the last day present (day-count residents), the day green card status ends (green card holders) or the later of the two (both), only with a tax home in and a closer connection to another country for the rest of the year, and the required statement.
• Never earlier if the person is resident in any part of the next year: then resident through December 31 of the departure year.
• A green card holder living abroad stays resident until the status is formally abandoned or taken away, or a treaty residence claim ends it (above).

Settle the date before acting; the shares can be moved to an eligible owner before then, but that transfer has its own tax result. A US citizen moving to Canada should read US S corporation owner in Canada.

The spouse is a nonresident alien. If a US shareholder's spouse is a nonresident alien with a current ownership interest in the shares under any law, such as a state community property law or a foreign country's law, the corporation is not eligible from the day the spouse gets that interest (26 CFR 1.1361-1(g)(1)). The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin; Alaska, South Dakota and Tennessee let couples elect community property (Publication 555). That can reach a shareholder on an H-1B or green card in California, Texas or Washington whose spouse still lives abroad. The regulation's own example is a US citizen living abroad whose shares became joint marital property under that country's law. Whether a spouse has such an interest depends on state or foreign law and on how the shares were acquired; that needs advice.

The regulation's second example shows one fix: where the couple's section 6013(g) choice to treat the spouse as a US resident was already in effect, the corporation was eligible (26 CFR 1.1361-1(g)(1)(ii)). The choice brings the spouse's worldwide income into US tax and can later be suspended or end; see married to a nonresident. The regulation does not say what happens to the S election if the choice ends; treat that as a risk.

Where shares are community property, both spouses must sign the Form 2553 consent (Form 2553 instructions; 26 CFR 1.1362-6(b)(2)).

Can an LLC, a partnership or another corporation own S corp shares?

Generally no. A shareholder must be an individual, an estate, a permitted trust or a section 401(a) or 501(c)(3) organization (section 1361(b)(1)(B)). The exceptions are a disregarded single-member LLC and a parent S corporation that owns all the shares. This is about an LLC holding shares; an LLC can itself elect S status (first table).

If a partnership, a corporation or a fund needs to own part of the shares, the corporation cannot stay an S corporation; see switching an S corporation to a C corporation.

Which trusts can be S corporation shareholders?

Only the trusts listed in section 1361(c)(2), and never a foreign trust. For most of them a person is treated as the shareholder, and that person must be eligible. A revocable living trust is usually a grantor trust, because the grantor can take the property back (section 676), so it can hold shares while the grantor is a US citizen or resident.

An ESBT may have a nonresident alien as a potential current beneficiary without ending the election (section 1361(c)(2)(B)(v); 26 CFR 1.1361-1(m)). A QSST or ESBT election that was missed can sometimes be filed late; see late S corporation election relief.

What does "one class of stock" rule out?

It rules out shares with different rights to distributions or liquidation proceeds. Voting and nonvoting shares are allowed (section 1361(c)(4)).

Rights are read from the governing provisions: the charter, articles, bylaws, state law and binding agreements about distributions and liquidation, which for an LLC include its operating agreement (26 CFR 1.1361-1(l)). Preferred shares, with a liquidation preference or a dividend priority, are a second class. If such a provision sits in the documents but no shareholder was ever paid differently, the corporation can often keep its election from the start without a ruling: it fixes the provision, and it and every shareholder who held shares meanwhile sign the statements in Rev. Proc. 2022-19, section 3.06 and keep them on file, all before the IRS finds the provision, with every Form 1120-S filed on time. Buy-sell, redemption and transfer-restriction agreements are generally ignored, unless a principal purpose is to get around the rule and the price is set significantly above or below fair market value; book value or a price between book and market is fine.

Distributions that differ in timing or amount do not by themselves create a second class when the governing provisions are identical, but they get tax effect and draw questions; see disproportionate distributions. Convertible notes, options and similar instruments have their own tests in the same regulation; review them before an investor signs.

What happens if an ineligible shareholder gets shares?

The election ends on the day the corporation stops qualifying (section 1362(d)(2)). If an ineligible owner held shares on the day the election was made, the election is not valid; if one held shares earlier in the year the election covers, it is treated as made for the next year (section 1362(b)(2)).

• The year splits. The days before the termination date form an S short year on Form 1120-S, with a statement giving the termination date; the rest is a C short year on Form 1120 (Form 1120-S instructions).
• Income is divided by day unless the corporation elects to use its books, with the consent of everyone who was a shareholder in the S short year or on the first day of the C short year; daily allocation is not allowed if 50% or more of the stock is sold or exchanged that year (section 1362(e)).
• Both short-year returns are due on the C short year's due date, including extensions.
• A new election without IRS consent waits until the fifth tax year after the first tax year in which termination took effect, but only after an election that was in effect ended (section 1362(g)). Where the election was never valid, or the corporation failed the tests on the first day of its first S year, it can elect again once every shareholder is eligible, without asking the IRS (26 CFR 1.1362-5(c)); the new election does not fix the years already lost, which takes the relief below.

Relief exists for an election that never took effect and for one that ended. Under section 1362(f), the IRS can treat the corporation as an S corporation for the period it sets if the event was inadvertent, the problem is fixed within a reasonable time after discovery, and the corporation and every shareholder agree to the adjustments it requires. The corporation asks through a ruling request and must show the event was inadvertent (26 CFR 1.1362-4). The regulations name a nonresident alien spouse's interest as a case where this relief may be requested (26 CFR 1.1361-1(g)(1)). Missing signatures and late filings follow other relief paths.

How do we check S corp eligibility before filing Form 2553?

Check every shareholder and every share term on the election's effective date, then again before any share is issued or transferred. Form 2553 is due within 2 months and 15 days after the start of the tax year it covers, or at any time during the year before; for a new company's timing, see S corporation from day one.

A shareholder agreement that restricts transfers to eligible owners generally does not create a second class of stock (26 CFR 1.1361-1(l)(2)(iii)), and it guards against a share being sold or given to someone who cannot hold it.

Example

These examples are illustrative; figures are in US dollars.

Two H-1B founders, and one moves home

Two founders on H-1B visas have each been in the US all year for several years. Both are resident aliens, so their corporation elects S status from January 1 and is eligible. In year three, one founder leaves on June 30, keeps a tax home and closer connection abroad, and files the statement for an earlier residency termination date; he is not a US resident at any time in year four. From July 1 a nonresident alien holds shares, so the election ends that day. The corporation earns US$365,000 that year: by daily allocation, US$181,000 goes to the S short year (181 days) and US$184,000 to the C short year (184 days). Had the founder not qualified for the earlier date, he would have stayed resident through December 31 and the election would have ended January 1 of the next year.

F-1 student in her third calendar year

A student arrived on an F-1 visa in August of year one and forms a corporation in year three. She is in her third calendar year as a student, so her days still do not count. If she keeps to her visa, has no green card and is not treated as a resident through a spouse, she is a nonresident alien, and an S election would not be valid while she holds shares. A C corporation or an LLC remains open to her; see C corporation or S corporation and starting an LLC on a visa.

A holding LLC with a brother

An owner wants his LLC, which he owns with his brother and which files as a partnership, to hold the corporation's shares, worth US$100,000. A partnership cannot be a shareholder, so the corporation cannot elect while the LLC holds the shares. The corporation can elect if each brother holds his shares directly, through his own single-member LLC disregarded for tax, or through a grantor trust he wholly owns, and both sign Form 2553.

Different for you?

• A shareholder is leaving the US, a spouse abroad may hold an interest, an F-1 founder already elected, or a trust or holding company bought shares: the election may never have taken effect or may already have ended; check the date and relief with corporate tax help.
• You plan to give or sell shares to a parent, child or other relative abroad: a relative who is a nonresident alien cannot hold them, even though family counts as one shareholder; check first with corporate tax help.
• You are unsure the S election pays off: see should you elect S corporation status.
• A new corporation choosing C or S, with investors or a foreign owner: see C corporation or S corporation.
• A venture fund or foreign investor wants in: see switching an S corporation to a C corporation and get corporate tax help.
• You hold a visa and are forming an LLC: see starting an LLC on a visa.
• You are a US citizen running the business from abroad: see LLC or S corporation while living abroad.
• You formed the company abroad and are moving to the US: see moving to the US with your US company.
• Your state may need its own S election: see state S corporation election.
• A shareholder never signed, or Form 2553 was late: see late S corporation election relief.
• Owners take unequal distributions: see disproportionate distributions.