
Many people are aware that they may be able to make an S corporation election, whereby they can change the organizational structure from a C corporation to an S corporation. As an S corporation they will be a pass-through entity, where profits of the corporation will not be taxed inside the corporation and instead will only be taxed on the shareholder's tax return. So, some owners of businesses that are organized as a C corporation rationalize that when they are preparing to sell they can simply make an S corporation election before they sell and avoid the risk of double taxation. Unfortunately, that may not be true unless the S corporation election is made well in advance of a business sale. Generally, if a C corporation is changed to an S corporation a business owner will have to wait for ten years before selling in order to avoid the double taxation of the proceeds of an asset sale (see 26 U.S. Code § 1374 - Tax imposed on certain built-in gains). Of course, the tax code is ridiculously complex and at Codiligent we are not CPAs, so we'd strongly encourage you to seek expert advice from your CPA and/or tax attorney to verify this and discuss your particular situation.