In the U.S., an S Corporation (S Corp) is a special type of business structure that allows companies to avoid double taxation by passing business income or losses directly to shareholders’ personal tax returns.
S corporations have strict ownership limitations that affect foreign entrepreneurs. Likely U.S. citizens, green card holders, and foreigners who maintain the Substantial presence test directly own S corporation shares. Non-resident aliens (foreign individuals who don’t qualify under these criteria) cannot own shares directly.
However, these foreign entrepreneurs may still have options – they can participate indirectly (S corporation) through an Electing Small Business Trust (ESBT). By participating in an ESBT a foreigner becomes a potential current beneficiary of an ESBT or a deemed owner of a grantor trust that elected to be an ESBT. So, if ESBT is a member of S Corporation then the S election remains valid even if ESBT has foreigner members.
This provides a legal pathway to navigate these ownership restrictions while maintaining compliance with IRS regulations.