An S corporation is not a kind of company you register with a state. You cannot walk into Delaware and form one. What you form is a corporation (or another entity the IRS lets you treat as a corporation), and then you send the IRS a form asking to be taxed under Subchapter S of the tax code.
That form is Form 2553, and the election is made under IRC § 1362(a). The IRS instructions open with the rule: "A corporation or other entity eligible to elect to be treated as a corporation must use Form 2553 to make an election under section 1362(a) to be an S corporation."
The word doing the work in that sentence is eligible. Congress wrote a list of conditions a company has to meet before the election is allowed, and one of those conditions names non-residents directly. This is the only place in this whole category where the law itself splits founders into two groups. Everywhere else, the split is caused by where you physically live or which forms you have to file. Here, the statute says it out loud.
What the law actually asks for
The eligibility list lives in IRC § 1361(b)(1). It says a "small business corporation" means a domestic corporation which is not an ineligible corporation and which does not:
- (A) have more than 100 shareholders,
- (B) have as a shareholder anyone who is not an individual, an estate, a trust described in § 1361(c)(2), or an organization described in § 1361(c)(6),
- (C) have a nonresident alien as a shareholder, or
- (D) have more than one class of stock.
Four conditions. Read (B) again, because people miss what it excludes. Shareholders have to be individuals (or certain estates, trusts and exempt organizations). A corporation cannot be a shareholder. A partnership cannot be a shareholder. That rules out most venture funds and most holding-company structures.
Condition (D) matters for the same reason. One class of stock means you cannot create a preferred class for investors on top of common stock for founders. Differences in voting rights are allowed. Differences in what shareholders get paid are not.
The IRS instructions for Form 2553 repeat condition (C) in plain words: the company "has no nonresident alien shareholders (other than as potential current beneficiaries of an ESBT)." The form and the statute say the same thing.
Two more rules from § 1362 decide how the election starts and how it dies:
- § 1362(a) requires the consent of every shareholder. Not a majority. All of them.
- § 1362(d) ends the election automatically the moment the company stops qualifying. If a share is sold to someone who is not allowed to hold it, nobody has to file anything for the election to be lost. It is gone on that date.
The filing deadline is in the IRS instructions: file Form 2553 within 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the preceding tax year. Late elections can sometimes be accepted if the company shows reasonable cause, under the relief procedure the IRS describes in those same instructions.
This page is about who is allowed to make the election. It is not about how much tax the election saves. That depends on your own numbers, and it is a question for your accountant.
🇺🇸 If the IRS counts you as a U.S. person
The election is open to you. What you have to watch is the four conditions, and the fact that you can lose the election without doing anything wrong yourself.
- Every shareholder has to sign. Under § 1362(a), one shareholder who refuses to consent stops the election. This is why the S election is usually decided at the start, when there are one or two owners, and not later.
- One class of stock. If you plan to raise money from an investor who wants preferred stock, the election ends when that stock is issued. Founders who expect to raise institutional money usually stay a C corporation for this reason.
- Watch who buys your shares. Because § 1362(d) terminates the election automatically, a single transfer to a partnership, an LLC taxed as a partnership, another corporation, or a nonresident alien kills S status on the spot. Many companies put a transfer restriction in their shareholder agreement precisely to prevent this.
- Spouses and family. The IRS instructions say spouses and family members may be counted as one shareholder for the 100-shareholder limit, so that ceiling is less tight than it sounds.
One thing that surprises people: being a resident alien is fine. Condition (C) blocks nonresident aliens only. If the IRS treats you as a resident under the green card test or the substantial presence test, you are inside this lane, regardless of your passport. Our page on who counts as a U.S. person explains how those two tests work.
🌏 If it does not
You cannot be a shareholder in an S corporation. Not "it is a bad idea," not "it is complicated." IRC § 1361(b)(1)(C) says a company with a nonresident alien shareholder is not a small business corporation, which means it is not eligible to make the election at all.
Three things follow from that.
It is one shareholder, not a majority. A single nonresident alien on the cap table disqualifies the whole company. If a U.S. friend owns 99% and you own 1%, the election is still unavailable.
Your status can change, and the election changes with it. If a shareholder in an existing S corporation stops being a U.S. person for tax purposes, the company stops qualifying, and § 1362(d) terminates the election on the date it happened. The company does not get a warning letter first.
The line is tax residence, not nationality. The statute never says "foreigner" or "non-citizen." It says nonresident alien. A foreign citizen who is a U.S. tax resident, because of a green card or the substantial presence test, may hold shares. A U.S. citizen who moves abroad is still a U.S. citizen, and still an eligible shareholder. Passport and tax residence are two different questions, and only one of them is in the statute.
What you can do instead is form an LLC or a C corporation. Neither one has a shareholder residency test. That is why almost every non-resident founder ends up in one of those two, and why the S corporation debate you see in American blog posts does not apply to you.
Where the two lanes split
| 🇺🇸 U.S. person | 🌏 Not a U.S. person | |
|---|---|---|
| Can you be an S corporation shareholder? | Yes | No. IRC § 1361(b)(1)(C) |
| Reason | You are an eligible individual shareholder | The statute names nonresident aliens as disqualifying |
| Can you own a U.S. LLC? | Yes | Yes |
| Can you own a U.S. C corporation? | Yes | Yes |
| Can a green card holder living abroad hold S corp shares? | Yes, a green card holder is a resident for tax | Not applicable |
| What ends the election | Failing any of the four conditions in § 1361(b)(1) | Same rule, and your presence on the cap table is itself a failure |
| Which form starts it | Form 2553, signed by every shareholder | You never get to file it |
The divergence here is total. It is not a difference in cost, paperwork, or difficulty. One lane has the option and the other lane does not.
Common mistakes
🇺🇸 If the IRS counts you as a U.S. person
- Issuing preferred stock to an investor and losing S status the same day, because of the one-class-of-stock rule in § 1361(b)(1)(D).
- Letting a shareholder transfer shares to their own LLC or family partnership. An entity cannot hold S corporation stock under § 1361(b)(1)(B), and the election terminates.
- Missing the filing window. The election has to be filed within 2 months and 15 days after the start of the tax year it should apply to, or during the year before.
🌏 If it does not
- Reading an American article about "LLC vs S corp," concluding you should elect S status, and filing Form 2553. The election is invalid, and the company was never eligible.
- Thinking a U.S. co-founder can hold the shares "on your behalf" so the company still qualifies. The shareholder is whoever the law treats as owning the stock, and arrangements that put a non-resident behind a nominee are not a solution.
- Assuming the bar is about citizenship. It is about tax residence. If you later become a U.S. tax resident, the door opens, and if you stop being one, it closes.
FAQ
Is an S corporation a type of company?
No. It is a tax election. You register a corporation (or an entity eligible to be treated as a corporation) with a state, then file Form 2553 with the IRS to elect S status under § 1362(a). The company on the state's records is still a corporation.
Can a nonresident alien own shares in an S corporation?
No. IRC § 1361(b)(1)(C) says a small business corporation does not "have a nonresident alien as a shareholder." A company with one is not eligible for the election.
I am not a U.S. citizen. Does that mean I am blocked?
Not necessarily. The statute blocks nonresident aliens. If the IRS treats you as a resident, through a green card or the substantial presence test, you are an eligible shareholder even without citizenship. Run the two tests on our U.S. person page first.
What happens if a nonresident alien buys shares in an existing S corporation?
The company stops meeting § 1361(b)(1), and under § 1362(d) the S election terminates automatically on that date. Nobody has to file anything for this to happen, which is why S corporations usually restrict share transfers in writing.
Can my U.S. LLC elect to be an S corporation if I live abroad?
No. The eligibility test looks at who the shareholders are, not at what the company was called when it was formed. A non-resident owner disqualifies the company under § 1361(b)(1)(C), whichever route it took to being treated as a corporation.
Can a venture fund invest in an S corporation?
Usually not. Under § 1361(b)(1)(B), a shareholder has to be an individual, an estate, a qualifying trust or a qualifying exempt organization. Funds are normally partnerships or corporations, so their investment would terminate the election. The one-class-of-stock rule in (D) blocks preferred stock as well.
What is the deadline for Form 2553?
The IRS instructions say to file within 2 months and 15 days after the beginning of the tax year the election should take effect, or at any time during the tax year before it. If you miss that, the instructions describe relief for late elections where the company can show reasonable cause.
If I am blocked from S status, what should I use instead?
An LLC or a C corporation. Neither has a residency test for its owners. Which of the two fits depends on how you plan to raise money and how you want to be taxed, and each has its own page in this guide.