Founder Profile

C Corp vs S Corp for a Foreign Founder

For a non-US person, the S corp option is closed by statute. IRC Section 1361(b)(1)(C) requires every S corp shareholder to be a US citizen or resident alien. The realistic choices are Delaware C corp with Form 5472, single-member LLC disregarded entity, or holding through a US-resident entity.

Updated May 2026. Cross-border tax is complex. This is educational, not advice.

Hard statutory rule

S corp is not available to non-resident aliens.

Even a single non-resident-alien shareholder terminates the S election under IRC 1362(d)(2)(A). A green card holder qualifies as a resident alien. A B-1/B-2 visitor does not.

The IRC 1361 eligibility wall

IRC Section 1361(b)(1)(C) restricts S corp shareholders to:

US citizens
Resident aliens (green card holders or those meeting the substantial presence test under IRC Section 7701(b))
Certain trusts (grantor trusts, QSST, ESBT)
Estates
Qualified retirement plans, ESOPs

Non-resident aliens, foreign corporations, foreign partnerships, and foreign trusts cannot hold S corp shares. A single transferred share triggers automatic termination of the S election on the date of the transfer.

Source: 26 U.S.C. Section 1361(b)(1)(C); 26 U.S.C. Section 7701(b)

The Delaware C corp path

The standard structure for a foreign founder operating a US business is a Delaware C corporation. Foreign individuals may hold any percentage of the shares. Federal tax is 21% on net income at the corporate level; dividends to a non-resident alien shareholder are subject to 30% withholding tax (reduced by treaty, often to 5 or 15 percent).

Compliance requirements include:

Form 1120 annual corporate return
Form 5472 reporting on transactions with foreign related parties (25% foreign owners)
Form 1042 and 1042-S reporting on US-source income paid to foreign persons
Delaware annual report and franchise tax (minimum $400 for assumed par value method)
State-level corporate registration in any state where the business has nexus

Source: IRS Form 5472; 26 U.S.C. Section 1442 (withholding on foreign corporations)

The single-member LLC disregarded entity alternative

A foreign-owned single-member LLC is disregarded for federal tax purposes by default. Income flows directly to the foreign owner. This may be useful for non-US-business activities (the LLC owns IP or operates outside the US) or for foreign owners who do not want US corporate tax exposure.

Reporting requirements changed materially in 2017. A foreign-owned single-member LLC must:

Obtain an EIN (Form SS-4)
File Form 5472 with a pro forma Form 1120 to report all reportable transactions with the foreign owner
Failure to file Form 5472 carries a $25,000 penalty per occurrence

If the LLC has Effectively Connected Income (ECI) from a US trade or business, the foreign owner must file Form 1040-NR and pay US tax on that ECI.

Source: T.D. 9796 (12 December 2016) extending Form 5472 to disregarded entities; IRS Form 1040-NR

If you become a US resident, the S option opens

Green card holders and substantial-presence-test residents qualify as resident aliens and may hold S corp shares. A foreign founder who plans to relocate to the US permanently may pre-form a C corp, then convert to S corp after becoming a US tax resident. Built-in gains under IRC Section 1374 apply if the C corp has appreciated assets at conversion.

See C corp to S corp conversion for the mechanics.

Treaty considerations

US bilateral tax treaties typically reduce withholding on US-source dividends, interest, and royalties paid to treaty-country residents. For example, the US-UK treaty generally reduces dividend withholding from 30 to 15 percent (5 percent for corporate shareholders owning at least 10 percent). The foreign founder claims treaty benefits via Form W-8BEN (individual) or W-8BEN-E (entity). Treaty shopping rules (Limitation on Benefits provisions) restrict access to treaty rates for entities without sufficient nexus to the treaty country.

Source: IRS Form W-8BEN; treaty texts at US Treasury Tax Treaty Documents

Sources

Cross-border tax requires specialist advice. Consult a US tax attorney and a tax advisor in your home country before structuring.

For a SaaS startup In Delaware S corp eligibility