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FinServ PartnersFinServ PartnersFinServ Partners
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Patia, Bhubaneswar, Odisha - 751017, India
FinServ PartnersFinServ PartnersFinServ Partners

C-Corp to S-Corp Conversion

C-Corp to S-Corp Conversion

A C-to-S conversion takes place when a C corporation opts to change its tax status to that of an S corporation. The primary reason a C corporation opts to change its tax status to that of an S Corporation is the differential tax treatment of the two.

A C corporation is treated as a separate tax-paying entity from its owners. A C corporation must pay taxes on its earnings at the company level. Then, once the corporation’s earnings have been taxed, the remaining after-tax net income can be distributed to shareholders as dividends; the shareholders then pay personal dividend taxes on the earnings distributed to them. Thus, a C corporation’s earnings are subject to double taxation, being taxed at both the company level and the shareholder level.

Conversely, An S corporation is considered a pass-through entity. The business itself does not pay any company-level taxes. The company’s before-tax earnings are distributed, or “passed through,” to shareholders, at which point the shareholders are taxed at their personal income tax rate. Thus, compared to C corporation earnings which are subject to double taxation, S corporation earnings are taxed only once.

 

In a C corporation, a shareholder can be any individual or any entity. Whereas, in an S corporation, shareholders can be any one of the following:

  • U.S. individuals
  • Estates
  • Certain trusts
  • Certain tax-exempt organizations
  • Resident aliens (green card holder or has a presence in the U.S.A. for a minimum of 183 days during the current year)

However, non-resident aliens, partnerships, LLCs, IRAs, C corporations, certain trusts, and tax-exempt organizations are not allowed to be shareholders in an S corporation. The maximum number of shareholders that an S corporation can have been capped at 100.

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