The company itself · A term for founders abroad
What is an S-Corporation?
A tax election that lets a US corporation or LLC pass its profit through to its owners; not available if any owner is a non-resident alien.
Checked against the IRS's instructions and the states' own rules. Reviewed by Saais Patel, compliance reviewer.
Term 86 of 105 in the glossary, filed under S.IRS: instructions for Form 2553
S-Corporation, for a founder abroad.
An S-Corporation isn't a different kind of company. It's a corporation, or an LLC taxed as one, that has elected on Form 2553 to pass its profit through to its shareholders, who pay the tax on their own returns. The company itself pays no federal income tax.
Only individuals, estates and certain trusts and exempt organisations can be shareholders, and none of them can be a non-resident alien. So a founder who isn't a US citizen and doesn't live in the US can't own one, whatever a sales page suggests. A US citizen living abroad still can.
The rules a company has to meet
- A domestic corporation, or an LLC that can elect to be taxed as one.
- No more than 100 shareholders, and no non-resident aliens among them.
- One class of stock, though voting rights can differ.
- Form 2553 filed no more than 2 months and 15 days after the start of the tax year it's meant to cover.
The election ends the day the company stops meeting those rules, for example when a shareholder moves abroad and becomes a non-resident alien, or sells shares to one. From then on it's taxed as a C-Corporation.
Sources: IRS: instructions for Form 2553; 26 U.S.C. § 1362, the S election and its termination; IRS: Publication 519, tax guide for aliens.
Read next · guide · 5 minLLC or C-Corporation for a founder outside the United StatesWhat founders ask next.
- Can a non-resident own an S-Corporation?
- No. The IRS's rules for Form 2553 allow no non-resident alien shareholders. A founder abroad who wants profit taxed once uses an LLC, which passes its profit through by default, without an election.
- Does an S-Corporation save a founder abroad self-employment tax?
- No. That saving is the usual reason Americans elect it, but a non-resident alien generally doesn't owe US self-employment tax in the first place, and can't own the company anyway.
- What happens if an S-Corporation shareholder moves abroad?
- If they become a non-resident alien, the company stops qualifying and the election ends that day. A US citizen who moves abroad stays eligible.
03 · See also
- The company itselfC-CorporationA US corporation taxed on its own profit, which issues stock and is what US investors' paperwork assumes; usually formed in Delaware.Read the term
- The company itselfLLCA US company whose owners aren't personally liable for its debts, and whose profit is taxed once, to the owners, unless it elects otherwise.Read the term
- US tax for an owner abroadPass-through taxationTax treatment where a company pays no income tax itself and its profit is taxed to its owners, as with an LLC or a partnership.Read the term
- The company itselfSingle-member LLCAn LLC with one owner; a disregarded entity for US income tax and, when the owner is foreign, a Form 5472 filer every year.Read the term
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