What Is the Maximum Number of S Corp Shareholders?

An S corporation provides business owners with the liability protection of a traditional corporation while offering a distinct tax structure. Its profits and losses are passed directly to the shareholders’ personal tax returns, avoiding income tax at the corporate level. This “pass-through” tax treatment is a primary appeal for many small businesses. To maintain this status, a company must adhere to eligibility rules established by the Internal Revenue Service (IRS), including a limitation on the number of shareholders.

The 100-Shareholder Limit

Internal Revenue Code Section 1361 states that a corporation electing S corp status may have no more than 100 shareholders. The purpose of this limitation is to keep S corporations as the intended vehicle for small or closely-held businesses. This structure distinguishes them from C corporations, which can be widely owned by the public and are subject to a different, multi-layered tax system. By capping the number of owners, the regulation helps maintain the administrative simplicity of the S corp election. Adherence to this number is a continuous requirement for maintaining S corp status.

Determining Who Counts as a Shareholder

Calculating the number of shareholders is more complex than simply counting names on a stock ledger. The IRS has specific rules defining who is an eligible shareholder. Eligible shareholders are limited to individuals who are U.S. citizens or residents, certain types of trusts, and the estates of deceased shareholders. Conversely, partnerships, corporations, and non-resident aliens are prohibited from owning S corp stock, and a transfer of shares to any of them would terminate the S corp election.

A significant rule in this calculation is the family attribution rule, which allows multiple family members to be treated as a single shareholder. An S corporation can elect to have all members of a family counted as one shareholder. For this purpose, a “family” is defined as a common ancestor, all lineal descendants of that ancestor, and the current and former spouses of those individuals. For example, a married couple, their three children, and a grandchild who all own stock would collectively count as just one shareholder.

This family election is a useful tool for family-owned businesses, allowing them to expand ownership across generations without jeopardizing their S corp status. While a husband and wife are automatically treated as one shareholder, this treatment ends upon divorce. If they each retain ownership of their shares post-divorce, they would then be counted as two separate shareholders, a detail that could have significant consequences for a corporation already near its ownership limit.

Consequences of Exceeding the Limit

Violating the 100-shareholder rule has a direct consequence: the termination of the company’s S corporation status. This termination is effective on the day the disqualifying event occurs, such as the date a 101st shareholder acquires stock. Upon termination, the company automatically reverts to being taxed as a C corporation. This means the business’s profits are first taxed at the corporate level and, if distributed as dividends, are taxed again on personal returns, creating the “double taxation” S corps avoid.

The IRS does provide a path for relief in cases of an “inadvertent termination.” If a corporation can demonstrate that exceeding the limit was unintentional and that it has taken steps to correct the issue promptly upon discovery, it can request a waiver from the IRS to have its S corp status retroactively reinstated.