S Corporation Shareholder Requirements

Not everyone can own stock in an S Corporation, and understanding the eligibility rules is important because violating them automatically ends the S Corporation election. S Corporations may have no more than 100 shareholders, and all shareholders must be U.S. citizens or permanent residents, certain qualifying trusts, or certain tax-exempt organizations. Corporations, partnerships, and nonresident aliens are not permitted to hold stock in an S Corporation, which limits the types of outside investors who can participate. An S Corporation may only issue one class of stock, meaning all shares must carry the same rights to distributions and proceeds in the event the company is sold or liquidated, although differences in voting rights between share classes are allowed. Business owners who want to bring in new investors or restructure ownership should review the S Corporation eligibility rules with a tax professional before making any changes to avoid an unintended loss of S Corporation status.