There are a variety of pros and cons for which type of legal organization a business founder may want to choose (S Corp, C Corp, LLC, Sole Proprietorship, Partnership) - so I'm not suggesting that there aren't some excellent reasons to choose to organize as a C corporation rather than as a S corporation (I'll cover pros and cons in another blog post). However, one of the negative consequences of choosing a C corporation is when you are ready to sell the business if the sale is structured as an asset sale you may experience double taxation of proceeds. The C corporation will sell the assets and it may be taxed on that sale, but then the proceeds will be trapped in the corporation unless they are distributed as dividends to the shareholders of the corporation. Once they are distributed as dividends the shareholder will be taxed on those dividends at the individual level, as well.
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.
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.
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