Shareholder Considerations

If you have or are planning to have shareholders who live outside of the United States, then the only corporation you can use is a C Corporation. The flow-through tax nature of the S Corporation is dependent on the fact that while the corporation isn’t paying taxes, its shareholders are. But if its shareholders are outside of the country, then a portion of profits will be leaving the United States without being taxed at all – and this is not something the IRS wants to support or encourage!

To prevent this exportation of tax dollars, S Corporation shareholders are all required to be U.S. residents (defined by the IRS as residing within the United States for a minimum period of time each year and, more importantly, filing a Form 1040 personal tax return). That doesn’t mean you have to be a U.S. citizen. You just need to be filing a U.S. tax return each year.

If you think you may have foreign residents who will want to invest in your corporation now or in the future, then you may be better served by starting off as a C Corporation, rather than beginning as an S Corporation and changing your corporation’s tax structure down the road. But if one of the foreign citizens moves outside of the country, the S Corporation election will be immediately revoked.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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