Kingsfield · Research · Tax

Which shareholders and entities are eligible to hold stock in an S corporation?

Published 2026-06-23 · U.S. federal law

Section 1361 defines a small business corporation eligible to elect S status, limiting it to no more than 100 shareholders, generally individuals, and barring nonresident alien shareholders.

The answer

The eligibility test

26 U.S.C. § 1361(b) defines a small business corporation as a domestic corporation with no more than 100 shareholders, no shareholder that is a nonresident alien, only eligible shareholders, and one class of stock.

Permitted shareholders

The shareholder list is restricted. Section 1361(b) generally limits shareholders to individuals, estates, and certain trusts, which is why most corporate and partnership shareholders disqualify the election.

The judged input

What the AI drafted

Submitted to the judge

This is an excerpt from a draft tax planning memorandum — the kind of work product a lawyer generates with a legal-AI drafting tool, then has to stand behind. Kingsfield does not write it; it rules on the citations the model put in it. This draft cites two authorities; one of them is wrong.

AI draft excerpt — tax planning memorandum

The Company proposes to admit a new investor and elect S corporation status. Under 26 U.S.C. § 1361(b), a small business corporation may have no more than 100 shareholders, no nonresident alien shareholder, only one class of stock, and only eligible shareholders such as individuals, estates, and certain trusts. Because the proposed investor is a partnership, it would disqualify the corporation, and the election itself would be made under 26 U.S.C. § 1362.

The judge ruled on every citation as the draft used it — it accepted 26 U.S.C. § 1361(b) and rejected 26 U.S.C. § 1362. Here is why.

The verdict

How Kingsfield ruled

Ruled 2026-06-23

Each citation in the draft above was submitted to the Kingsfield judge and ruled against the primary-law corpus — Accept, Reject, or Inconclusive, per citation. These are live verdicts, not editorial. Each card shows the claim the draft made and the verbatim authority the verdict was rendered against.

Accept26 U.S.C. § 1361(b)

The draft claimed: A small business corporation eligible for S status is a domestic corporation with no more than 100 shareholders, no nonresident alien shareholder, only one class of stock, and only eligible shareholders such as individuals, estates, and certain trusts.

“§ 1361(b) For purposes of this subchapter, the term “small business corporation” means a domestic corporation which is not an ineligible corporation and which does not—”

Cite found; proposition supported by the cited text.

Reject26 U.S.C. § 1362

The draft claimed: Section 1362 sets the definition of a small business corporation, including the 100-shareholder cap and the bar on nonresident alien and entity shareholders.

Cite found, but the cited text does not support the claim. 26 U.S.C. 1362 governs how a corporation makes, and how it terminates or revokes, the S election; the shareholder eligibility definition is at 26 U.S.C. 1361(b). Regenerate with the correct authority.

Run your own work through the judge

Kingsfield rules on every citation, quote, and proposition your AI produces, against the primary law we cover. Accept, Reject, or Inconclusive, per citation, with a signed Audit Capsule.

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This page is legal information, not legal advice, and does not create an attorney-client relationship. The draft shown is an illustration of a typical AI answer; verdicts reflect the cited authority in the Kingsfield corpus as of the ruling date shown above.