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When Should Your Business Switch from an S-corp to a C-corp?

On Behalf of | Jan 15, 2025 | Business & Employment |

Are you thinking of switching from an S corporation to a C corporation? It’s a big step forward, akin to your company declaring, “We’re ready for more.” It can open up new opportunities to expand your market and attract different kinds of investors. 

While a bit complicated, changing your business structure can be a smart way to drive your business toward more ambitious long-term goals. It’s more than just changing how you do taxes. By understanding its benefits, you can set your business up to reach its full potential. 

What is the Difference Between S-corps and C-corps? 

Both S and C corporations protect owners from personal liability. However, they have different tax and ownership rules. 

  • S-corps put profits and losses on shareholders’ personal tax forms. These businesses can have up to 100 shareholders and one type of stock. This often helps small businesses avoid corporate taxes. 
  • C-corps, on the other hand, file their own tax returns. They can have any number of shareholders and different types of stock. However, these benefits come with increased regulatory requirements and potential tax implications. Preparation is crucial when switching from one business structure to another. 

When to Consider Switching from an S-corp to a C-corp 

Your business structure should evolve as your company grows. Some of the signs that it might be time to consider switching to a C-corp include: 

  • You’re Seeking Significant Outside Investment
    C-corps are the preferred structure for venture capitalists and institutional investors. Their ability to issue multiple stock classes and provide ownership flexibility makes them more attractive to large investors. 
  • You’re Planning to Go Public
    If your long-term goals include an initial public offering (IPO), transitioning to a C-corp is essential, as publicly traded companies must operate as C-corps. 
  • You Need to Offer Equity Compensation
    C-corps can issue stock options and equity incentives to attract and retain top talent. S-corps face restrictions in this area due to their shareholder limitations. 
  • You’re Experiencing Significant Profits
    While S-corps avoid double taxation, the corporate tax rates for C-corps may become more favorable when profits grow. Retained earnings can also remain within the company without immediate taxation at the shareholder level. 
  • You’re Expanding Internationally
    Foreign investors and international operations often necessitate the flexibility of a C-corp, as S-corps limit non-resident shareholder participation. 

While these general factors can guide you, your business’s unique situation may bring up other important points to consider. 

Embracing the C-corp Status 

Before making the switch, look over your five-year business plan. Internal Revenue Service (IRS) rules limit how often you can change your status, so timing matters. If you decide to push through, align it with your financial projections for an easier switch. 

To shift into a C-corp in Minnesota, you must follow three key steps: 

  • Cancel your S-corp status with the IRS 
  • Update your articles of incorporation 
  • Renew your business permits 

The decision to switch from an S-corp to a C-corp depends on your business’ growth trajectory, financial goals, and long-term plans. While the process involves careful planning and consultation, the benefits of a C-corp—such as scalability, investor appeal, and tax advantages for retained earnings—can be invaluable for growing businesses. 

If you’re considering a change in corporate structure, contact Quinlivan & Hughes. Our experienced attorneys can guide you through the legal and financial considerations, ensuring the transition aligns with your business goals. 

 Learn more at Quinlivan.com.