Can a Foreigner be a Shareholder of an S-Corporation?

Becoming an S-Corporations

Some startup companies benefit from starting out as an S-corporation, while others remain C- Corporations.   Corporations can elect to remain C-Corporations for a number of reasons, including tax deductions only available for C-Corporations, the corporation does not qualify as an S-Corporation, or the shareholders’ desire to have the opportunity to exclude from gross income 100% (until December 31, 2013, thereafter 50%) of the gain from the sale of “qualified small business stock” .

Generally a corporation fails to qualify for S-Corporation status if one or more of the following situations apply:

  1.  ANY owner of the corporation is another business entity or a non-resident alien (as described further below)
  2. The corporation will be owned by more than 75 persons
  3. The corporation plans to issue more than one class of stock (i.e., special allocations of profits and losses will be made that are not proportionate to the equity percentage of each owner).

Non-resident Aliens and S-Corporations

Although the tax code permits certain foreigners to be shareholders of S-Corporations, it is generally not advised, as foreigners who do not stay in the country long enough during a particular year can inadvertently cause the corporation to lose its S-Corporation status.  This can cause adverse and unintended tax consequences to the other S-Corporation shareholders.

Whether a foreigner is a non-resident alien does not depend on the visa class held by the immigrant.  Rather, under the IRS code, only a green card holder or one who meets the “Substantial Presence Test” determines whether an alien is eligible to be an S Corporation shareholder.

However, individuals under certain visas such as the F-1 or J-1 may be considered “Exempt Individuals” during this time period.  “Exempt Individual” status means that the individual does not count the days of actual presence in the U.S. for purposes of satisfying the Substantial Presence Test.  Thus, the visa classification of these types of individuals could, actually, hinder them meeting the Substantial Presence Test.

Substantial Presence Test

The Substantial Presence Test is a calculation that determines the resident or nonresident status of a foreign national for tax purposes in the United States. The Substantial Presence Test must be applied on a yearly basis.

The following calculation determines the number of days to satisfy the substantial presence test:

First, the individual must be present in the U.S. for at least 31 days during the current calendar year. Then, the individual must use the following calculation to satisfy the substantial presence test if:

  • ALL of the days physically present in the U.S. in the current calendar year
  • PLUS 1/3 the number of days physically present in the U.S. during the first preceding year
  • PLUS 1/6 the number of days physically present in the U.S. during the second preceding year
  • EQUALS 183 days or greater, the individual is considered resident alien for tax purposes.

 If you are considering issuing starting a company, contact IBV Advisory Group Inc. for a consultation. You can call 310-746-3837 or email evelyn@ibvadvisorygroup.com.