As the home of the world’s largest capital markets, the United States offers new corporations the possibility to grow rapidly with facilitated access to venture capital, angel investors, and private equity.
Is it possible for foreigners to be shareholders in US corporate businesses? Read on to find out.
Understanding the Shareholder’s Role – The Essentials
A shareholder is an individual or entity that owns a share of a corporate business. If a person owns at least one share of stocks or mutual funds of a company, that individual can be considered a shareholder.
In layman’s terms, the shareholders are the owners of a corporation. The ability to control and influence business decisions varies depending on the percentage of ownership.
C-Corporations vs. S-Corporations – Explaining the Difference
US law permits aspiring business owners to form two distinct types of corporations – C-Corporations or S-Corporations.
When a business is incorporated in any US state, it is considered a C-Corporation by default. C-Corps are subject to double taxation, which means the income generated by the company is taxed at the corporate and individual levels.
On the other hand, S-corporations are corporate business structures that choose to be taxed under Subchapter “S” of the Internal Revenue Code, which explains the designation.
Similar to limited liability companies (LLCs), S-corporations are not subject to double taxation. All income and losses generated simply “pass-through” the company to its shareholders, which must file taxes on their personal income.
Please note that the S-Corporation itself only files taxes on passive income and capital gains. Depending on the state where the business was incorporated, the rules can be largely flexible.
For example, if an S-Corp incorporated in the state of Florida does not generate excess net passive income, built-in gains, or last-in-first-out (LIFO) recapture, an income tax return is not required.
Can a Foreigner Be a Shareholder in a US Company? – The Verdict
Foreign nationals can be shareholders in a US company, but there are a few limitations depending on the business structure. First, it is important to distinguish the terms “resident alien” and “non-resident alien.”
A resident alien is a foreign national who has a green card or meets the substantial presence test. Conversely, non-resident aliens are foreign nationals who neither have a green card nor meet the substantial presence test.
Both resident and non-resident aliens can be shareholders of a C-corporation. While US law does not restrict the participation of foreigners in C-corporations, S-corporations do not admit non-resident aliens as shareholders.
S-Corp ownership is restricted exclusively to US citizens, permanent residents, or resident aliens. Since 2018, the amended section 1361(c)(2)(B)(v) of the Tax Cuts and Jobs Act of 2017 has removed part of the restrictions associated with non-resident alien shareholders.
Direct S-Corp ownership is still restricted, but non-resident aliens have the option to be indirect shareholders through an Elected Small Business Trust (ESBT). This way, the trust is treated as a shareholder of the US S-Corp and must file the required federal income tax at the trust level.
Do You Want to Become a Shareholder in a US Company? – Ensure a Smooth Experience by Working with a Well-Versed Business Attorney
Attorney Romy B. Jurado is willing to help you attain your entrepreneurial goals in the United States. Contact us today by calling (305) 921-0976 or emailing [email protected] to schedule a consultation.