{"id":172,"date":"2012-04-22T10:05:05","date_gmt":"2012-04-22T17:05:05","guid":{"rendered":"http:\/\/myersthoughts.com\/?p=172"},"modified":"2015-01-28T12:58:47","modified_gmt":"2015-01-28T20:58:47","slug":"c-corporations-risk-losing-millions","status":"publish","type":"post","link":"https:\/\/masonmyers.com\/c-corporations-risk-losing-millions\/","title":{"rendered":"C Corporation Business Owners are at Risk of Losing Millions"},"content":{"rendered":"

I lost huge money early in my career in not electing to switch my company from a Corporation to an S Corporation.\u00a0 I don’t want you to make the same mistake.\u00a0 Each year, the owners of C Corporations have an opportunity to switch their tax status with the IRS from C Corporation to S Corporation if they send in a simple election form by March 15.\u00a0 The goal of this post is just to get you thinking.\u00a0 Please triple-check everything and your individual circumstance with your tax advisers.\u00a0\u00a0As most of you know, a limited liability company (LLC) also has the advantage of being a flow-through entity for tax purposes.\u00a0\u00a0This post is\u00a0primarily for\u00a0C Corporation owners.
\n
\nWhat is an S Corporation?<\/strong><\/p>\n

First, an S Corporation can only be owned by individuals (and I do not think foreign individuals).\u00a0 And second, there can only be one class of stock.\u00a0 So, no one can have Preferred Stock with preferences (liquidation, dividend, etc.) over the Common Stock.\u00a0 If you are an S corporation, the company does not pay income tax.\u00a0 Thus, you may avoid the double-tax conundrum when you try and distribute cash out of a C Corporation.\u00a0 This is caused because the C corporation pays income tax, and then the cash dividends (or gains on asset sales) are also taxed at the individual level.\u00a0 It’s pretty simple: C corporations pay two-levels of tax and S corporations only pay tax at the individual level.<\/p>\n

How it works<\/strong><\/p>\n

It is a simple filing with the IRS.\u00a0 You tax ID # doesn’t change.\u00a0 Your name or incorporation doesn’t change.\u00a0 It is just a change in tax status.\u00a0 For the filing to be effective on Jan 1, it must be filed before March 15.\u00a0 Once you file, you pay no more income taxes at the company level.\u00a0 All the income flows to the owners and they pay income tax at the personal level.\u00a0 So, you no longer pay two levels of tax!<\/p>\n

Benefits when you sell<\/strong><\/p>\n

Also, if\/when you sell, you get huge benefits.\u00a0 Most buyers want to buy assets.\u00a0 If you sell them assets rather than stock, you pay cap gains tax at two levels (company and individual) and that is very depressing.\u00a0 It takes much of the value of your company and gives it to the government.\u00a0 If you elect to be an S corp, you declare the value of your company at the time of the S election.\u00a0 If you sell your business within 10 years of the S election (my tax advisers say sometimes only up to 7 years), you only pay double tax on the amount up to the declared value at the time of the election and everything above that is only taxed at the individual level.\u00a0 If you sell after 10 years, there is no corporate level tax on the sale at all.\u00a0 There is no downside to the S election and potentially millions of dollars of tax savings for you down the road.<\/p>\n

Scenarios of taking investment after S election<\/strong><\/p>\n

1)\u00a0 Make S Election, no sale or investors.\u00a0 You are in good shape and there are no issues.\u00a0 Manage your company and celebrate only paying one level of tax.<\/p>\n

\u00a02)\u00a0 Make S Election, and later Investor Requires C Corporation.\u00a0 Most all institutional private equity firms can only invest in C Corporations because they get their capital from many non-profit entities (university endowments, pension funds, etc.) that cannot have flow-through income that would endanger their non-profit status with the IRS.\u00a0 In this case, I think it’s a pretty easy change back to a C Corporation that can be done at any time of the year (probably should double-check this to make sure).\u00a0 Becoming an S Corp can only be done at the beginning of the year.\u00a0 It may be a little awkward to make the S Election and then go back to a C Corp later in the same year, but there are no IRS\/legal issues that I know about.\u00a0 Presumably, if you were getting an investment from a private equity firm, the deal would be worth it for you to switch back.\u00a0 Having the S Corp in place right before the deal gets done probably also gives the private equity firm more flexibility on how they could structure the deal.\u00a0 For example, they could buy assets (better for them) from your S Corp (great for you b\/c any value above the value you declared at the election won’t be double-taxed) and they might even want to create a new C corp to avoid liabilities in the old corporation.\u00a0 With my PE hat on, I can see how they would rather you be an S Corp even if they make the new entity a C Corp post-investment.\u00a0 For the record, Greybull Stewardship can invest in flow-through entities and greatly prefer to do so!<\/p>\n

\u00a03)\u00a0 Make S Election, and later Investor Cannot Invest in S Corps (only individuals can invest in S Corps).\u00a0 In this scenario, you would create a new LLC as a wholly owned subsidiary of your S Corp and contribute all the assets of your S Corp to the new LLC.\u00a0 Then, the new investor buys equity in the LLC from the S Corp.\u00a0 The hassle here might be changing some of your regulatory approvals from the S Corp to the LLC and then creating new bank accounts and Tax ID #’s for the new LLC. I would also suggest that you keep the S Corp in place because you’ll be able to run some business expenses through the S Corp to save taxes that you might not want to run through the LLC because you have co-owners in the LLC.\u00a0 With Greybull Stewardship, this is the scenario that we have executed several times.\u00a0 It works well.<\/p>\n

\u00a04)\u00a0 Make S Election, and later receive investment from an individual.\u00a0 No issues.\u00a0 The individual would be a co-owner of the S Corp with you.\u00a0 Only small item here might be that you can only have one type of stock here, so you can’t have a Preferred Stock and a Common Stock where different owners have different preferences.\u00a0 If your individual investor wanted that, you could execute scenario #3.<\/p>\n

In my opinion, I think the S election helps you in all the scenarios.\u00a0 If you are a C Corp with individual owners, I beg you to make the S election now and you can share some of your tax savings with me down the road!<\/p>\n

\n
Categories:Business Financing & Funding<\/a>, Investment & Business Models<\/a>, Sell or Buy a Business<\/a><\/span>
Tags:C Corporation<\/a>, Equity Investor<\/a>, Financial Strategy<\/a>, Greybull Stewardship<\/a>, Investment<\/a>, investment terms<\/a>, S Corporation<\/a>, Sell a Business<\/a>, Taxes<\/a>, Venture Capital<\/a>
<\/span><\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"

I lost huge money early in my career in not electing to switch my company from a Corporation to an S Corporation.\u00a0 I don’t want you to make the same mistake.\u00a0 Each year, the owners of C Corporations have an opportunity to switch their tax… Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6,18,11],"tags":[80,85,84,13,86,32,81,87,365,15],"yoast_head":"\nInvestment, Business Models | Investment Strategy | Mason Myers Business Blog for Owners, Investors<\/title>\n<meta name=\"description\" content=\"Business owner and investor Mason Myers writes about investment business models, as well as investment strategy on his business blog, masonmyers.com.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/masonmyers.com\/c-corporations-risk-losing-millions\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"Investment, Business Models | Investment Strategy | Mason Myers Business Blog for Owners, Investors\" \/>\n<meta name=\"twitter:description\" content=\"Business owner and investor Mason Myers writes about investment business models, as well as investment strategy on his business blog, masonmyers.com.\" \/>\n<meta name=\"twitter:creator\" content=\"@masonlmyers\" \/>\n<meta name=\"twitter:site\" content=\"@masonlmyers\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Mason Myers\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"5 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/masonmyers.com\/c-corporations-risk-losing-millions\/\",\"url\":\"https:\/\/masonmyers.com\/c-corporations-risk-losing-millions\/\",\"name\":\"Investment, Business Models | Investment Strategy | Mason Myers Business Blog for Owners, Investors\",\"isPartOf\":{\"@id\":\"https:\/\/masonmyers.com\/#website\"},\"datePublished\":\"2012-04-22T17:05:05+00:00\",\"dateModified\":\"2015-01-28T20:58:47+00:00\",\"author\":{\"@id\":\"https:\/\/masonmyers.com\/#\/schema\/person\/efbf4e28b9f46a9b2ae855d03197ab3f\"},\"description\":\"Business owner and investor Mason Myers writes about investment business models, as well as investment strategy on his business blog, masonmyers.com.\",\"breadcrumb\":{\"@id\":\"https:\/\/masonmyers.com\/c-corporations-risk-losing-millions\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/masonmyers.com\/c-corporations-risk-losing-millions\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/masonmyers.com\/c-corporations-risk-losing-millions\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/masonmyers.com\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"C Corporation Business Owners are at Risk of Losing Millions\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/masonmyers.com\/#website\",\"url\":\"https:\/\/masonmyers.com\/\",\"name\":\"Mason Myers Blog\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/masonmyers.com\/?s={search_term_string}\"},\"query-input\":\"required name=search_term_string\"}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/masonmyers.com\/#\/schema\/person\/efbf4e28b9f46a9b2ae855d03197ab3f\",\"name\":\"Mason Myers\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/masonmyers.com\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/87932f33f3b27a6574032d65b17644d1?s=96&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/87932f33f3b27a6574032d65b17644d1?s=96&r=g\",\"caption\":\"Mason Myers\"},\"url\":\"https:\/\/masonmyers.com\/author\/mason-myers\/\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Investment, Business Models | Investment Strategy | Mason Myers Business Blog for Owners, Investors","description":"Business owner and investor Mason Myers writes about investment business models, as well as investment strategy on his business blog, masonmyers.com.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/masonmyers.com\/c-corporations-risk-losing-millions\/","twitter_card":"summary_large_image","twitter_title":"Investment, Business Models | Investment Strategy | Mason Myers Business Blog for Owners, Investors","twitter_description":"Business owner and investor Mason Myers writes about investment business models, as well as investment strategy on his business blog, masonmyers.com.","twitter_creator":"@masonlmyers","twitter_site":"@masonlmyers","twitter_misc":{"Written by":"Mason Myers","Est. reading time":"5 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/masonmyers.com\/c-corporations-risk-losing-millions\/","url":"https:\/\/masonmyers.com\/c-corporations-risk-losing-millions\/","name":"Investment, Business Models | Investment Strategy | Mason Myers Business Blog for Owners, Investors","isPartOf":{"@id":"https:\/\/masonmyers.com\/#website"},"datePublished":"2012-04-22T17:05:05+00:00","dateModified":"2015-01-28T20:58:47+00:00","author":{"@id":"https:\/\/masonmyers.com\/#\/schema\/person\/efbf4e28b9f46a9b2ae855d03197ab3f"},"description":"Business owner and investor Mason Myers writes about investment business models, as well as investment strategy on his business blog, masonmyers.com.","breadcrumb":{"@id":"https:\/\/masonmyers.com\/c-corporations-risk-losing-millions\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/masonmyers.com\/c-corporations-risk-losing-millions\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/masonmyers.com\/c-corporations-risk-losing-millions\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/masonmyers.com\/"},{"@type":"ListItem","position":2,"name":"C Corporation Business Owners are at Risk of Losing Millions"}]},{"@type":"WebSite","@id":"https:\/\/masonmyers.com\/#website","url":"https:\/\/masonmyers.com\/","name":"Mason Myers Blog","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/masonmyers.com\/?s={search_term_string}"},"query-input":"required name=search_term_string"}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/masonmyers.com\/#\/schema\/person\/efbf4e28b9f46a9b2ae855d03197ab3f","name":"Mason Myers","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/masonmyers.com\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/87932f33f3b27a6574032d65b17644d1?s=96&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/87932f33f3b27a6574032d65b17644d1?s=96&r=g","caption":"Mason Myers"},"url":"https:\/\/masonmyers.com\/author\/mason-myers\/"}]}},"_links":{"self":[{"href":"https:\/\/masonmyers.com\/wp-json\/wp\/v2\/posts\/172"}],"collection":[{"href":"https:\/\/masonmyers.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/masonmyers.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/masonmyers.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/masonmyers.com\/wp-json\/wp\/v2\/comments?post=172"}],"version-history":[{"count":15,"href":"https:\/\/masonmyers.com\/wp-json\/wp\/v2\/posts\/172\/revisions"}],"predecessor-version":[{"id":1514,"href":"https:\/\/masonmyers.com\/wp-json\/wp\/v2\/posts\/172\/revisions\/1514"}],"wp:attachment":[{"href":"https:\/\/masonmyers.com\/wp-json\/wp\/v2\/media?parent=172"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/masonmyers.com\/wp-json\/wp\/v2\/categories?post=172"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/masonmyers.com\/wp-json\/wp\/v2\/tags?post=172"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}