An S Corporation can have a maximum of 100 shareholders. While the term "members" typically refers to owners of a Limited Liability Company (LLC), S Corporations have owners who are legally referred to as shareholders.
Understanding S Corporation Shareholder Limits
The Internal Revenue Service (IRS) imposes specific rules on businesses that elect S Corporation status for tax purposes. This election allows a business to pass its income, losses, deductions, and credits through to its shareholders' personal income without being subject to corporate tax rates, thereby avoiding double taxation. A core requirement for maintaining S Corp status is adhering to its shareholder limitations.
Key Shareholder Requirements
Beyond the numerical limit, S Corporations must also comply with other crucial eligibility criteria regarding their shareholders:
- Maximum Number: An S Corp cannot have more than 100 shareholders.
- Shareholder Type: Generally, shareholders must be individuals, certain trusts (such as grantor trusts, qualified Subchapter S trusts, or electing small business trusts), or estates. Partnerships, corporations (including other S Corps), and most LLCs are not permitted to be S Corp shareholders.
- Residency: All shareholders must be U.S. citizens or resident aliens. Non-U.S. citizens or non-resident aliens are explicitly prohibited from being shareholders in an S Corporation.
- Single Class of Stock: An S Corporation can only have one class of stock. While there can be differences in voting rights among shares, the economic rights (e.g., dividends and liquidation rights) must be identical for all shares.
Failing to meet any of these requirements can lead to the termination of the S Corporation election, resulting in the entity being taxed as a C Corporation.
S Corp vs. LLC: Ownership Differences
It's common to confuse the ownership terms and limitations between S Corporations and Limited Liability Companies (LLCs) because both are popular choices for small businesses. However, their rules regarding owners (members vs. shareholders) differ significantly.
Here's a quick comparison of ownership characteristics:
| Feature | S Corporation (S Corp) | Limited Liability Company (LLC) |
|---|---|---|
| Owner Term | Shareholders | Members |
| Maximum Owners | 100 | Unlimited |
| Owner Residency | U.S. citizens or resident aliens only | U.S. citizens, resident aliens, or non-U.S. citizens/residents |
| Permitted Owners | Individuals, certain trusts, and estates | Individuals, corporations, partnerships, other LLCs |
Understanding these distinctions is crucial when deciding on the optimal business structure for your venture, particularly concerning growth plans and investor diversity.
For comprehensive details on S Corporation rules and regulations, you can refer to official IRS guidance, such as IRS.gov.
