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Can you have S Corp Foreign Shareholders? A Comprehensive Guide

Panna Kemenes

29.08.23 (updated more than 1 year ago)

Read time 3 minutes

Many foreign investors may wonder if they can own shares of US companies.

Foreigners who are residents of the United States (US resident aliens) may own some US companies. Foreign shareholders in S corps can also receive some of the same investment benefits as US citizens.

📝 Read on to discover:
Can an S corp have foreign shareholders? Advantages and Disadvantages of S Corporations for Foreign Shareholders Tax Implications for Foreign Shareholders in S Corporations Conclusion: Owning an S corp for foreign shareholders

Can an S corp have foreign shareholders?

In what case can an S corp have foreign shareholders? The answer to this question depends on the person’s residency status.

U.S. Residency Requirements for S Corporation Shareholders

Only US residents can own shares of an S corporation. Non-residents who want to own shares of a company should consider other options, such as a C corporation.

Resident Alien: Resident aliens, also referred to as US residents, can own shares in an S corporation.
Non-resident alien: Before 2018, there was no way for non-residents to own shares of an S corporation. However, non-resident aliens can now invest in these companies through an Electing Small Business Trust (ESBT).

Advantages and Disadvantages of S Corporations for Foreign Shareholders

A Limited Liability Company (LLC) can file for S corporation status for tax purposes. Other entities, like sole proprietors, can’t issue shares to investors.

Filing an S corporation can be an option if you are a resident of the United States and want to attract shareholders. However, there are multiple legal requirements if you go this route.

There are many advantages for S Corp foreign shareholders:

Disbursements: You can receive a share of the company’s net income through a disbursement.
Share Class: There are no special shares classes for S corporations, so all the shareholders enjoy the same benefits.
Accessing the US market: Investing in an S corporation is a unique way to access the US market. Some of these companies may be valued at a discount to larger publicly traded companies.

Investors should also consider the following risks before deciding to invest in shares of an S corporation:

Exchange rate/currency: Foreign investors should consider the impact of exchange rate movements and how these impact their investments.
Double taxation: Anyone who invests in an S corporation with operations in the United States will have to pay taxes in the United States. Investors may have to pay taxes in both countries.
Tax consultation: Filing taxes may be more challenging. You will need to find an accountant familiar with tax laws in your country and the United States.

Tax Implications for Foreign Shareholders in S Corporations

S corporations can pass corporate taxes onto shareholders. The shareholders pay taxes at the individual level. This allows shareholders to avoid double taxation at the corporate level.

Foreign shareholders need to be legal residents of the United States. Therefore, these shareholders are responsible for paying US taxes and filing various forms to stay in compliance with the IRS.

⚠️ This should not be taken as official tax advice. When dealing with taxes, it is always recommended to seek information from a professional tax advisor.

Compliance and Reporting Obligations

IRS Forms and Filings for S Corporation Foreign Shareholders

Foreign shareholders of S corporations have specific tax forms they need to file. Some of these include Schedule K2 or K3 forms.¹ These forms help companies report details about foreign activity and foreign ownership.

Businesses may also need to file other forms, such as Form 1116 and Form 114. These forms allow S corporations to report foreign activity, such as offshore bank accounts.

According to the latest updates under the 2017 Tax Act, foreign owned corporations need to pay a 21% federal tax. Moreover, businesses are also responsible for state taxes and state franchise fees.²

Record-Keeping and Documentation Requirements

It is crucial to keep records of your business activity, even if you are not audited immediately after filing taxes. Moreover, companies that have foreign owners may have additional filing requirements.

Having a separate business account is good practice for keeping business and personal finances separate, and can save a great deal of time in case of an audit.

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Conclusion: Owning an S corp for foreign shareholders

Owning shares of an S corporation can be possible for foreign investors. However, the tax laws and reporting requirements can be challenging to navigate.

Investors who choose to invest in S corporations should seek the help of accountants that understand international tax laws. Having a dedicated business account is also good practice to keep business and personal finances separate in case of an audit.

Read more:
How to Open a Business Bank Account Online What do I need to open a business bank account? Full guide Do I need a business bank account? Can a Non-US Citizen Own a C Corporation?

Sources

Sources checked August 2023.

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