2025 S Corporation Eligibility Guide

2025 S Corporation Eligibility Guide｜Shareholder Limits · One-Class-of-Stock Rule · Family Election Explained

Thinking about electing S Corporation status for your small business in 2025?
This guide walks you through the IRS eligibility rules — shareholder limits, who can own shares, the one-class-of-stock rule, the family-shareholder election, and key filing steps.

📘 Table of Contents

Basic Eligibility Requirements
How to Count Shareholders
Eligible Shareholders
Ineligible Shareholders
The One-Class-of-Stock Rule
Family Election Option
Form 2553 and Compliance Checklist
Helpful Resources and Related Posts

1️⃣ Basic Eligibility Requirements (2025)

To qualify as an S Corporation under IRS Code §1361, a business must meet five core requirements:

No more than 100 shareholders
All shareholders must be eligible individuals or trusts
Non-resident aliens (NRAs) cannot be owners
The corporation must be domestic (U.S. entity)
Only one class of stock is allowed (same economic rights for all shares)

Violating any of these rules can terminate S status.
It’s wise to review bylaws and shareholder agreements each year to ensure continued compliance.

2️⃣ How to Count Shareholders

The IRS looks at the number of shareholders at any given time.
Even a temporary increase above 100 disqualifies S status.

💡 Example 1 | Joint Ownership
A husband and wife holding shares jointly are counted as one shareholder,
but both must sign Form 2553 when electing S status.

💡 Example 2 | Family Election
Parents and three adult children owning shares can file a family election to be treated as one shareholder, preserving room for additional investors or employees.

Nominee or custodial accounts are counted by the beneficial owner.
For a minor’s UTMA account, the child is considered the shareholder.

3️⃣ Eligible Shareholders

Individuals – U.S. citizens and resident aliens
Estates – during probate periods
Specific Trusts – Grantor, §678, Testamentary, Voting, ESBT, and QSST trusts
Tax-exempt entities – churches or qualified charities (subject to UBTI)
Single-member LLCs – if the owner is an eligible individual

Income from an S Corporation flows through to the owners’ individual returns.
Some states (like New York or California) require separate registration or a state-level election for recognition.

4️⃣ Ineligible Shareholders

Non-resident aliens (NRAs)
C Corporations or other business entities
Unqualified or foreign trusts

⚠️ Example 3 | Foreign Spouse Ownership
A U.S. citizen wife forms an S Corporation, but her non-resident alien husband is a co-owner.
This immediately terminates S status unless the couple makes a §6013(g) election to treat him as a tax resident.

5️⃣ The One-Class-of-Stock Rule

All shares must carry the same rights to distributions and liquidation proceeds.
Differences in voting rights are allowed, but differences in economic rights create a second class of stock and invalidate S status.

💡 Example 4 | Unequal Distribution Arrangement
“Class A receives quarterly dividends; Class B gets year-end bonuses.”
This is considered different distribution rights and violates the one-class-of-stock rule.
Pay bonuses as compensation instead of profit distributions.

6️⃣ Family Election Option

Since 2004, families with a common ancestor and their lineal descendants (including spouses) may elect to be counted as one shareholder.
This can include up to six generations and is helpful for family-owned businesses or succession planning.

💡 Example 5 | Filing a Family Election
The statement must include:
① Names of all family members included
② Identification of the common ancestor
③ Effective tax year (start of the year chosen)
Keep the election on file with corporate records; withdrawal requires consent of all members.

7️⃣ Form 2553 and Compliance Checklist

To elect S Corporation status, file Form 2553 with the IRS promptly after formation or at the start of the tax year.
After approval, maintain compliance each year with these checkpoints:

Include the one-class-of-stock rule in corporate bylaws and agreements
Verify every shareholder is eligible before stock issuance
Document family elections in writing and retain records
Separate reasonable compensation from profit distributions
Confirm state filing or PTET requirements annually

2025 S Corporation Eligibility Guide