C Corporation to S Corporation Conversion

One of the big questions you have to answer for yourself when considering incorporating your business is whether to classify yourself as a C corporation or an S corporation, also called a subchapter S corporation. This decision will have a big impact on the way your business is taxed. The main difference between the two is that a C corporation pays state and federal taxes on its earned income and shareholders are taxed on earned dividends. This is called double-taxation. An S corporation pays no income taxes. Instead, the owners of the business, the shareholders, pay taxes on the company’s profit. This is a pass-through model.

C corporations may find that they can realize significant tax savings by converting to S corporation status. To convert from a C corporation to an S corporation, you’ll have to file a Form 2553 with the IRS. This is something that should be discussed with your tax advisor because their experience may help you avoid the common pitfalls of C corporation to S corporation conversion. One of the things they’ll consider if this question arises is the value of your business, including goodwill, which we discussed here in our post about the Small Business Association. It is very important that a thorough business appraisal be conducted prior to restructuring in order to fix the value of the corporation’s stock, assets, and goodwill.

By: Present Value

Tags: business appraisal, C Corp to S Corp Conversion, c corporation to s corporation conversion, Goodwill, Tax issues
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