The short answer is no. A non-resident alien cannot own a S-corporation. Only U.S. citizens and permanent residents can. If a foreigner becomes a shareholder in an S-Corporation, it will lose its S-corporation status.
According to IRC § 1361(b)(1)(C), an S corporation generally cannot have a “nonresident alien as a shareholder.” A non-resident alien is an individual who is not a US citizen or a US resident alien.
What Happens is a Foreigner Becomes a Shareholder in an S-Corporation?
Initially, in order to become an S-corporation, the business has to submit Form 2553 “Election by a Small Business Corporation” to the IRS. This form has to be signed by all of the corporation’s shareholders.
The treatment of a corporation as an S-corporation for a particular year “shall be terminated whenever . . . such corporation ceases to be a small business corporation.” 26 U.S.C. § 1362(d)(2)(A). “Termination of S corporation status ‘shall be effective on and after the date of cessation.’ § 1362(d)(2)(B). In other words, the S-Corporation will no longer be considered such on the year when a foreigner becomes its shareholder.
What Are the Benefits of an S-Corporation?
Asset protection is one benefit of selecting and S-corporation status. This means that the shareholders are not personally liable for the corporation’s debts and cannot be personally pursued by the corporation’s creditors for any debts incurred by the corporation.
Another benefit of an S-corporation is that it is taxed by the IRS as a pass-through entity. In other words, the corporation’s business losses and deductions pass through to the corporation’s owners and can be offset on their personal tax return. This avoids the double taxation of the corporation on its corporate income.
It is important to note that aside from restricting its shareholders to only U.S. citizens and permanent residents, S-corporations also have a list of other requirements to fulfill before being classified as an S-corporation. This list includes but is not limited to not having more than 100 shareholders, being a domestic corporation and having only one class of stock.
