Are you a small business owner with a growing client base and annual revenue?
In 2026, you might be missing out on significant tax savings if you haven’t considered S Corporation status yet.
S corporations are corporations that choose to pass their income, losses, credits, and deductions directly to their shareholders for tax reporting purposes.
However, it is important to understand the eligibility requirements for S corporations before you file for an S corp online.
If you don’t know, then you might end up:
- Disqualified
- Costing your business valuable tax advantages
So, here we will learn to qualify for S corporation status in 2026.
1) Be A Domestic Corporation
Your business needs to be a domestic corporation to qualify for S corporation status. This means it has to be incorporated under the laws of a U.S. state or territory. Your business won’t qualify for the tax benefits of an S corporation if your business is set up in another country.
The process to qualify for a domestic corporation starts with filing your articles of incorporation with the state and getting recognized as a legal entity.
Only the corporations that are officially formed within the U.S. can make the S election and take advantage of its tax treatment.
2) Have Only Allowable Shareholders
S corporations have strict rules about who can own shares in the company. This keeps them closely held and ensures they work as intended.
Who Can Be Shareholders?
Individuals, both U.S. citizens and resident aliens, are eligible to own shares in an S corporation. The corporation can have anywhere from one shareholder to up to 100 shareholders.
Estates can hold shares too. If a shareholder passes away, their estate can inherit their stock.
The family can be treated as a single shareholder in cases of family ownership. It helps stay within that 100-shareholder cap.
3) May Be Individuals, Certain Trusts, and Estates
S corporation shareholders must fall into one of the specific categories:
Individuals
The primary group of people who can own shares in an S corporation are U.S. citizens and resident aliens. This means anyone who lives in the U.S. and is considered a tax resident can hold shares.
| NOTE: A non-resident alien who is not a U.S. citizen and doesn’t live in the U.S. cannot own shares in an S corporation. |
Certain Trusts
Grantor Trusts
These are the trusts where the person who has created the trust retains control over the assets and is responsible for the taxes. Shares owned by the grantor trust are considered as owned by the grantor for purposes of the 100 shareholder rule.
Qualified Subchapter S Trust (QSST)
A special type of trust designed for S corporations. In this trust, a single individual beneficiary is the only beneficiary of the trust’s income. This trust type allows the S corporation to maintain its S status while benefiting from trust ownership.
Electing Small Business Trusts (ESBT)
These trusts can hold S corporation stock, but they are subject to specific rules. An ESBT can have multiple beneficiaries, but it is a bit more complex than a QSST.
Estates
The estate of the deceased shareholder can hold the shares of the S corporation. This is important for estate planning. It allows the stock to pass on to the estate and be managed by the executor until it is distributed to heirs.
4) May Not Be Partnerships, Corporations, or Non-Resident Alien
S corporation shareholders must generally be U.S. citizens, certain estates, or qualifying trusts. Shareholders cannot be:
- Partnerships
- Corporations (like C corporations or other S corporations)
- Nonresident aliens (foreign individuals who don’t meet the criteria to be U.S. tax residents)
Why Can’t Partnerships, Corporations, or Non-Resident Alien Be Shareholders?
If a partnership owned stock in an S corporation, it would be tough for the IRS to track the actual owners behind the partnership. S corporations can’t have other corporations (like C corps or other S corps) as:
- IRS wants to make sure the ownership is easy to track
- A large corporation could own a chunk of an S corp’s stock, and technically, bypass the 100-shareholder limit
Similarly, nonresident aliens can’t own shares in an S corporation because of different tax rules and tax complications.
5) Have Only One Class of Stock
All outstanding shares must have identical rights when it comes to distributions and liquidation proceeds. The IRS checks a few key documents to make sure the S corporation is following this rule. They check:
- The corporate charter and articles of incorporation
- The bylaws
- State laws and any shareholder agreements
If these documents create any sort of difference in the economic rights of shareholders, it could lead to a violation of the rule.
Conclusion
It is important to understand the eligibility requirements of the S corporation status. Make sure your business is a domestic corporation, has allowable shareholders, maintains only one class of stock, and avoids ineligible entities.
Take action now and file your S Corp online to enjoy the tax benefits and protect your business’s financial future.
