8972 / Who can be a shareholder in an S corporation? What restrictions apply to 2 percent shareholders in an S corporation?
An S corporation may have up to 100 shareholders (none of whom are nonresident aliens) who are individuals, estates, and certain trusts.
Members of a family are treated as one shareholder. “Members of a family,” for this purpose, means “the common ancestor, lineal descendants of the common ancestor, and the spouses (or former spouses) of such lineal descendants or common ancestor.” Generally, the common ancestor may not be more than six generations removed from the youngest generation of shareholders who would be considered members of the family.1
Only certain trusts can qualify as S corporation shareholders. These trusts include: (1) a trust all of which is treated as owned by an individual who is a citizen or resident of the United States under the grantor trust rules; (2) a trust that was described in (1) above immediately prior to the deemed owner’s death that continues in existence after such death may continue to be an S corporation shareholder for up to two years after the owner’s death; (3) a trust to which stock is transferred pursuant to a will may be an S corporation shareholder for up to two years after the date of the stock transfer; (4) a trust created primarily to exercise the voting power of stock transferred to it; (5) a qualified subchapter S trust (QSST), see Q 8973; (6) an electing small business trust (ESBT), see Q 8974; and (7) in the case of an S corporation that is a bank, an IRA or Roth IRA.2 An estate can continue to be an eligible shareholder during the reasonable period of administration. This can continue for the duration of payments being made under IRC Section 6166 (relating to the deferral of the estate tax for certain estates containing closely held business interests).3
1. IRC § 1361(c)(1).