Do I Need to Change my Corporate Structure From an S Corp to a C Corp Now That I am Established?
In 2018, the federal government changed the tax laws and that change has led to many of our Charlotte business clients asking “Should I change my corporate structure from an S Corp to a C Corp?”
Smaller businesses wondering if their current status as an S corporation should be changed to a C corporation have several factors to consider as to whether this is a good idea or not. Generally speaking, if your business is still small and your revenue is well under $10 million, it typically makes sense to stay as an S corporation. However, if your company is growing rapidly and you are looking to bring in new investors and issue different types of stock options, then you may actually be required by the IRS to convert to a C corporation.
Practically speaking, there are two ways an S corporation can be converted to a C corporation. The first way is a voluntary revocation of S corporation status. The default for any corporation is to be a C corporation unless S corporation status is specifically applied. However, just because a company had previously elected to be an S corporation does not mean they cannot revoke that election and become a C corporation.
The other way that a S corporation can be terminated and converted to a C corporation is by the IRS. The IRS will automatically terminate S corporation status when a corporation has over 100 shareholders. The IRS may also terminate a company’s S corporation status if some of the shareholders are ineligible by law of being part of an S corporation. Another way the IRS may consider terminating S corporation status, as a matter of law, is that the company issues different classes of stock. An S corporation is only allowed to issue one type of stock to all shareholders.
It often makes sense to bring in a tax professional to weigh whether an S corporation is a stronger vehicle than a C corporation or vice versa. Generally speaking, the benefit of a C corporation is that the operation is taxed at lower rates than an S corporation. A C corporation also offers a broader range of tax-deductible fringe benefits such as certain insurance plans and life insurance, health insurance, etc.
Not everything is better as a C corporation, however. For example, a C corporation. is subject to double taxation. Earnings from the corporation are initially taxed at the federal tax rate. And then when dividends are distributed to shareholders, it is taxed once again. The double taxation can hurt the overall profitability and may be unattractive vs. an S corporation. Another drawback of a C corporation is that shareholders cannot adopt corporate losses. An S corporation is essentially a pass-through, and individual shareholders can take losses on their personal tax returns. This is not available in a C corporation.
Keep in mind: In most instances, if you convert your S corporation to a C corporation, you will not be allowed to change it back for approximately five years. Though the IRS does have some discretion to reduce this waiting period.
If you find yourself wondering “Should I change my corporate structure from an S Corp to a C Corp?,” either because you are growing and want to bring in new investors or at different types of stock or simply because you think there might be lucrative tax advantages, it makes sense to talk to an experienced business lawyer, as well as a certified public accountant. Our firm, SeiferFlatow, has experience with these matters and will be happy to discuss it with you, as well as provide you with resources for finding CPA who fits your business.