LLC vs S-corp: can non-residents choose S-corp status?

Can a non-resident's LLC elect S-corp status?

No, not while any owner is a nonresident alien. Section 1361 of the tax code allows S-corp status only for a company with no nonresident alien shareholder, and the IRS lists the same test in the Form 2553 instructions. The rule looks at the owners, not the company: a Wyoming or Delaware LLC is a domestic entity, but one foreign owner makes it ineligible.

A nonresident alien is anyone who isn't a US citizen and doesn't meet either the green card test or the substantial presence test, which counts the days you spend in the US. The rule is about tax status, not where you live. A US citizen or green card holder living in India can own S-corp shares; an Indian citizen living in India can't.

What is an S-corp? A tax election, not a type of company

An S corporation is a corporation, or an entity that can be taxed as one, such as an LLC, that elects to pass its income, losses, deductions and credits through to its shareholders for federal tax. You still form an LLC or a corporation with the state. The "S" only changes how the IRS taxes it.

An LLC makes the election on Form 2553, which every shareholder signs. It doesn't need a separate Form 8832: the LLC is treated as a corporation from the date the S election takes effect. File no more than 2 months and 15 days after the start of the tax year the election should cover, or at any time during the year before. The IRS can accept a late election if you had reasonable cause and acted quickly once you noticed.

From then on, the company files Form 1120-S by the 15th day of the 3rd month after its tax year ends (March 15 for a calendar year) and gives each shareholder a Schedule K-1 showing their share of the income.

The eligibility tests

• A domestic corporation, or a domestic entity eligible to be taxed as one, such as a US LLC.
• No more than 100 shareholders. A married couple, and members of a family, can count as one.
• Only allowed shareholders: individuals, estates, certain trusts and certain tax-exempt organizations. Partnerships and corporations can't own shares.
• No nonresident alien shareholders, except as potential current beneficiaries of an ESBT.
• One class of stock. All shares must carry identical rights to distributions and liquidation proceeds; only voting rights may differ.
• Not an ineligible corporation, such as certain banks and insurance companies.

The one-class rule reaches LLCs too. An operating agreement that gives members different rights to distributions can break it, so have a CPA or lawyer review yours before electing. Our guide to the LLC operating agreement covers what those clauses look like.

Who actually benefits from S-corp status?

S-corp status is mainly a way to reduce self-employment tax, the 15.3% Social Security and Medicare tax that US citizens and residents pay on business profit: 12.4% for Social Security, up to a yearly earnings cap, plus 2.9% for Medicare. A US-resident LLC owner generally pays it on the business's net earnings.

With S-corp status, an owner who works in the business takes a reasonable salary, which carries payroll taxes, and can take the remaining profit as distributions, which don't. The IRS requires reasonable compensation before any non-wage distributions, so a token salary invites trouble.

That makes it a fit for a US resident with steady profit comfortably above a fair salary for their role. When profit is small, payroll processing, Form 1120-S preparation and state filings can cost more than the tax saved. A US CPA can model both with your numbers.

Why it wouldn't help a founder abroad anyway

Nonresident aliens are generally not subject to US self-employment tax at all, unless an international Social Security agreement (a totalization agreement) says otherwise. So the tax that S-corp status is designed to cut usually isn't there to cut. Your US income tax depends instead on whether the LLC has income effectively connected with a US business.

LLC vs S-corp vs C-corp at a glance

For the C-corp column in depth, including dividend withholding and Delaware franchise tax, read LLC vs C-corp for non-US founders.

What can foreign owners do instead?

Keep the default LLC tax treatment

This is the simplest route. A single-member LLC owned from abroad files Form 5472 with a pro forma Form 1120, a multi-member LLC files Form 1065, and US income tax generally applies only to income effectively connected with a US business. US taxes for non-resident LLC owners explains how to tell whether you have any.

Choose C-corp taxation, or form a C-corp

An LLC can file Form 8832 to be taxed as a corporation, and unlike an S election, that has no ownership limits. The company then pays 21% on its profits, and dividends to you face US withholding at 30% or your treaty rate. It can suit a business that reinvests its profits. If you're raising venture capital, investors will want a real corporation, usually in Delaware.

A US co-founder and a foreign co-founder

An S-corp is off the table while any owner is a nonresident alien. One option is a multi-member LLC taxed as a partnership, where each member is taxed on their own share: the US member under US rules, the foreign member generally only on income connected with a US business, with withholding on that share. See single-member vs multi-member LLCs.

If you move to the US later

Once you become a US tax resident, through a green card or the substantial presence test, you're no longer a nonresident alien, and S-corp status becomes possible if every other test is met. Time it with a CPA: Form 2553 has strict deadlines, and your first year as a resident can come with special rules for part-year residents.

Which should you choose?

• Not a US citizen or green card holder, living outside the US: a standard LLC. S-corp status isn't available to you.
• A US resident with steady profit well above a fair salary: an LLC taxed as an S-corp may cut your self-employment tax. Confirm with a CPA.
• Co-founders in and outside the US: a multi-member LLC taxed as a partnership, or a C-corp if you're raising money.
• Raising venture capital: a Delaware C-corp. S-corps can't have fund or corporate shareholders or a second class of stock.

Still choosing a state? Start with the best state for an LLC as a non-resident, then compare plans and pricing.

Frequently asked questions