Trusts as S Corporation Shareholders

June 2022

BY

Christopher HartmanManager, Private Client Services

Katherine A. WalterManaging Director, Private Client Services

The following article, Trusts as S corporation shareholders, originally appeared in the May 2022 issue of The Tax Adviser.

An S corporation structure is an advantageous option for many companies; however, business owners must ensure that they comply with the mandates of the Internal Revenue Code (IRC) and Treasury regulations to avoid losing their status as an S corporation. These mandates include a 100- shareholder limit, and each shareholder must qualify as an eligible S corporation shareholder. Eligible shareholders include individuals who are U.S. residents or citizens, as well as estates of decedents or individuals in a Title 11 (bankruptcy) case (Sec. 1361(b)). Nonresident aliens are prohibited from holding S corporation stock, except as discussed below for electing small business trusts (ESBTs). Generally, a trust cannot hold stock of an S corporation; however, grantor trusts, testamentary trusts, voting trusts, ESBTs, and qualified Subchapter S trusts (QSSTs) are permissible S corporation shareholders (Sec. 1361(c)(2)).