The S corporation status has been available to most corporations for many years. According to the Internal Revenue Service, S corporations are now the most common corporate entity.
It is increasingly rare to come across a company that qualifies to be an S corporation (and would benefit from being one) that has not gone ahead with the conversion process. That’s not to say that all companies have taken advantage of this potential benefit.
If your business continues to be structured as a C corporation it is well past time that you at least investigate the possibility of converting to S corporation status. A sub chapter S election for most companies can substantially enhance shareholder benefits, both on an interim basis and at the time of an eventual sale of the company.
These advantages can enhance after-tax proceeds to shareholders upon the sale of a business. Many transactions are structured as the sale of assets, rather than the sale of stock. Purchasing assets is generally more beneficial to the buyer and can generally lead to a maximization of the transaction price.
An asset sale of a C corporation will lead to a double layer of taxes (gains inside the company being taxed as well as taxes paid in getting the proceeds out to the shareholders).
An S corporation structure, with the single layer of taxation and the step-up in basis, typically provides more efficiency in terms of after-tax shareholder proceeds.
While the economics of an S election can be favorable, there are certain drawbacks, including:
While the above discussion outlines some of the primary advantages and disadvantages of an S election, any company considering such an election should discuss their specific considerations with their accountant or tax advisor.
If a company determines it should take advantage of its option to elect S Corporation status, a fair market value appraisal of the company is required as of the election date. If you are considering converting to an S Corporation and, therefore, require a valuation, please let us know if we can be of assistance.