Part 8: Understanding the 100-Shareholder Limit & Family Rules for S-Corporations

👥 Understanding the 100-Shareholder Limit & Family Rules for S-Corporations

One of the most misunderstood parts of S-Corporation eligibility is the rule limiting the number and type of shareholders.
In this Part 8 guide, we break down the 100-shareholder limit, family aggregation rules, eligible owner categories, and common pitfalls that can accidentally terminate S-Corp status.

1️⃣ The Core 100-Shareholder Limit

S-Corporations may have up to 100 shareholders.
However, through family aggregation, the actual number of individuals can be much higher.

• Each eligible shareholder counts toward the limit
• C-Corporations, partnerships, and nonresident aliens are prohibited
• Trust rules add additional complexity

Going over the limit—even unintentionally—can terminate S-Corp status retroactively.

2️⃣ Family Aggregation Rules (One Family = One Shareholder)

IRS rules allow multiple family members to be treated as a single shareholder for the 100-shareholder test.

👪 Who qualifies as “one family”?

• Common ancestor
• Lineal descendants (children, grandchildren, great-grandchildren)
• Spouses (including former spouses)

This rule allows multi-generational businesses to stay within the S-Corp limits.

3️⃣ Eligible vs Ineligible Shareholders

✅ Eligible Shareholders

• U.S. citizens
• U.S. resident individuals
• Specific trusts (QSST, ESBT, grantor trusts)
• Certain estates

❌ Ineligible Shareholders

• C-Corporations
• Partnerships / LLCs taxed as partnerships
• Foreign individuals who are not U.S. tax residents
• Most non-grantor trusts

Even a single ineligible owner can disqualify the entire S-Corp.

4️⃣ Community Property & Married Filing Status Issues

In community property states, a married couple may be treated as one or two shareholders depending on their filing status.

💍 Key rules

• MFJ → counted as one shareholder
• MFS → may count as two shareholders
• Ownership agreements override default state rules when properly drafted

This often affects S-Corp status during divorce, separation, or marital property changes.

5️⃣ Foreign Owners & Residency Pitfalls

Nonresident aliens (NRA) cannot own S-Corp stock under any circumstances.

• Green card ≠ automatic residency (must pass U.S. tax residency rules)
• Foreign spouses may create ownership issues
• Residency changes mid-year can terminate S-Corp status

This is one of the most common accidental termination triggers for businesses with global families.

6️⃣ How Shareholder Mistakes Terminate S-Corp Status

Common real-world causes:

• Selling shares to a partnership
• Allowing a foreign owner to inherit stock
• Exceeding 100 shareholders without family grouping
• Invalid trusts becoming shareholders
• Issuing preferred shares by mistake

If termination occurs, it is often retroactive—causing a C-Corp conversion and heavy tax liabilities.

7️⃣ EA Checklist — Keeping S-Status Safe

• Review shareholder list annually
• Confirm U.S. residency and eligibility every year
• Document family relationships for aggregation
• Use QSST/ESBT elections properly
• Review stock transfer restrictions in bylaws

8️⃣ Related EA Tax Guide Articles

🔝 Back to Top