S-corporations (S-corps) are a popular business structure with strict eligibility rules, especially regarding who can be a shareholder. There’s a myth among some tax practitioners that only U.S. citizens or residents with Social Security Numbers (SSNs) qualify as shareholders. This myth often leads tax professionals to assume that individuals with Individual Taxpayer Identification Numbers (ITINs) cannot be shareholders. In reality, ITIN holders who meet the IRS’s Substantial Presence Test and qualify as U.S. tax residents are eligible to be S-corp shareholders.
S-Corp Shareholder Requirements
To qualify as an S-corp, an entity must be a domestic corporation with no more than 100 shareholders, and those shareholders must meet specific eligibility criteria. Only U.S. citizens or residents (those who qualify as U.S. tax residents under IRS criteria) can be S-corp shareholders. Nonresident aliens are explicitly prohibited (IRC § 1361(b)(1)(C)). Since ITIN holders are often assumed to be nonresidents, confusion arises. However, ITIN holders who meet the Substantial Presence Test and qualify as tax residents can legally be S-corp shareholders.
Residency Status and the Substantial Presence Test
The IRS determines residency status for tax purposes using two main tests: the Green Card Test and the Substantial Presence Test. Under the Green Card Test, lawful permanent residents (Green Card holders) are classified as residents for tax purposes (IRC § 7701(b)(1)(A)(i)). However, individuals without Green Cards may still be classified as resident aliens if they pass the Substantial Presence Test, which considers the number of days they’ve been physically present in the U.S. over a three-year period (IRC § 7701(b)(3)).
For example, an individual present in the U.S. for 190 days in a single year or who meets a formula-based calculation over three years qualifies as a resident for tax purposes. Once classified as a resident under the Substantial Presence Test, an ITIN holder is considered a U.S. resident for tax purposes and therefore qualifies to be an S-corp shareholder. This tax residency qualification is independent of the individual’s immigration status and does not require an SSN.
Misconceptions About ITIN Holders as S-Corp Shareholders
A common misconception is that ITIN holders cannot be S-corp shareholders due to their lack of SSNs. However, the IRS clarifies that “ITIN holders are eligible to be a shareholder of a Subchapter S corporation” if they qualify as U.S. residents through the Substantial Presence Test. This debunks the myth that tax residency requires an SSN. Instead, ITIN holders meeting the Substantial Presence Test fulfill the residency requirement and can thus be eligible S-corp shareholders (IRC § 1361(b)(1)(C)).
Legal Implications and Employment Status
Some tax professionals worry that advising ITIN holders to be S-corp shareholders could imply illegal conduct if the individual is also employed by the S-corp without work authorization. However, legal interpretations suggest that a sole owner with control over the corporation may not be considered an “employee” under certain immigration laws. This distinction provides additional assurance that ITIN holders who meet the Substantial Presence Test can participate in S-corps without legal issues related to employment status.
Relevance for Tax Practitioners
ITIN holders residing in the U.S. who meet the Substantial Presence Test are classified as tax residents and are eligible to be shareholders in an S-corp. This eligibility is independent of their SSN status or immigration status. The IRS recognizes this tax residency distinction, making it clear that ITIN holders who meet the Substantial Presence Test should not be automatically excluded from S-corp ownership, dispelling a persistent myth in the tax community. Tax practitioners should be aware of this myth to avoid costly advice to the client.