Should You Change Your S Corporation To A C Corporation?

11/09/2016 08:46 pm ET
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As your business grows and evolves, the business legal structure you start with may not serve your company’s changing needs in the long term. While you might have made the right choice when you launched your business, developments such as hiring more employees, seeking financing, introducing new lines of business, etc. may render your initial choice of structure less beneficial.

For example, an S Corporation offers more flexibility and room for growth than a sole proprietorship or LLC, but at some point it may no longer keep up with your entrepreneurial vision and goals for your company.

Has your S Corporation outgrown its business legal structure?

If any of the following characteristics apply to your company, you might explore changing to a C Corporation.

  • “Pass-through” taxation is no longer favorable for your business. An S Corporation is NOT taxed separately from its owners / shareholders. Corporate profits and losses are reported on the personal income tax returns of the shareholders, much like a partnership. With a C Corporation, your company is treated as a separate entity and tax obligations are separate from those of shareholders.
  • You want the opportunity to raise more capital. Structuring your company as a C Corporation gives you more freedom in quantity and type of shareholders your company has—and that opens the door to raising more capital. Also, your S Corp shareholders must be individuals or trusts. With a C Corporation, you have no limits on the number of shareholders who invest in your company, and other corporations may be shareholders. You may also bring on foreign investors as shareholders in a C Corp, whereas with an S Corp your shareholders must be U.S. citizens or resident aliens. In addition, a C Corporation allows you to offer more than one class of stock, so you can maintain decision-making power in one class but still allow for participation in earnings with an additional class.
  • You would feel more secure having more expansive personal liability protection. A C Corporation provides a greater degree of personal liability protection than other business structures. The liability protection extends to shareholders, directors, officers, and employees.

Prepare For More Formality

With the potential advantages of changing to a C Corporation, expect some added layers of complexity, as well. C Corps are typically subject to more regulatory oversight, and there are more formation and ongoing compliance formalities to deal with, too.

Learn Before You Leap

I always advise business owners to consult with trustworthy legal and accounting professionals for guidance before they jump into decisions about business structure. With your choice of legal structure affecting your company financially, legally, and administratively, make sure you’re aware of all the pros and cons. And don’t make the mistake of trying to navigate all of the formation and compliance paperwork on your own. Errors or omissions could delay processing and cause major headaches. Consider asking an attorney for assistance or enlist the help of a company that provides business document filing services to ensure your registration and compliance obligations are met accurately and on time.

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