Situation: A company’s accountant advises them to transition from a C Corporation to an S Corporation. Remaining a C Corp would force them into accrual accounting with significant tax consequences. The accountant also advises that it is easier to sell an S Corp to a buyer, and S Corp status would relieve problems with retained earnings. Which do you think is preferable, C or S Corp status?

Advice from the CEOs:

• Accountants disagree. Get a second opinion. Also consult a tax or corporate lawyer who will provide another perspective.
• Another company looked at S vs. C status and found two key factors:
  • S Corp status is great if you expect to lose money for a few years because of the benefit that it can offer to personal taxes. Over the long-term you should look at the difference between personal and corporate tax rates and set your strategy so that it makes the most sense.
  • An S Corp cannot have non-U.S. shareholders.
• There is more flexibility with C Corp status in your ability to grant options, sell shares, etc. For a suitor, purchase of C Corp shares prior to a full acquisition is like a date before deciding on marriage.
• C Corp status is good if you are building an empire. S Corp status is better if want to have employee ownership under an ESOP as an option for exit.
• Since taxes are a significant part of this decision, think carefully before you shift from cash accounting.
  • Once you commit to accrual accounting you can’t go back to cash basis.
  • To the extent have an accrued tax liability you can extend payment of this liability over multiple years.
• You also may want to consider a hybrid accounting method:
  • Accrual for sales
  • Cash for service
  • Look at whether there are tax advantages to a hybrid model.

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