Can I issue shares in my S corporation to a resident alien?

You can issue shares in your S corporation to a resident alien, but there is some risk involved. There are four requirements under the Internal Revenue Code for an S corporation to maintain its status as such for the taxable year in which the election to be treated as an S corporation was made: it must be a U.S. corporation (1) having 100 shareholders or less; (2) having only individuals as shareholders (with the exception of estates and certain trusts); (3) having only one class of stock; and (4) not having a “nonresident alien” as a shareholder. The first three requirements are easily controlled by the corporation’s shareholders. But if an existing shareholder fails to maintain his status as a “resident alien” for unforeseen reasons—for example, because he is unable to travel to, and be physically present in, the U.S. for at least 31 days in the calendar year due to an unexpected illness—then there is little the other shareholders can do to control that eventuality. And if that happens, the corporation can lose its S corporation status, with potentially disastrous tax consequences for all of the shareholders. For that reason, an S corporation must be very cautious about having foreigners as shareholders. For more information, see our discussion of The Risk of Having a Foreigner Be a Shareholder of an S Corporation.