What would be the downside in converting to a C-Corp. from an S-Corp?

Answer 1

Here is a comparison of the different business types, after which I will answer your question.

A sole proprietorship has the least amount of expense and headaches to setup and operate, but the also the least amount of liability protection. If you go bankrupt as a SP you must declare personal bankruptcy. Income and losses are taxed to you personally and also completely subject to Self Employment tax of 15%.

An LLC is an option you do not mention, but it offers liability protection and is an organization that is more difficult to set up and operate than an SP but less than a Corporation. Income is taxed on your personal tax return as a "pass through". These taxes may be higher if you have income right away, but if you have losses they are deductible against ordinary income on your tax return. SET is due on your salary, but not necessarily on company profits.

An S- corporation has the same tax status as an LLC but is more complicated to setup and operate. If offers liability protections.

A C-Corp is the most complicated to setup and operate, but income is taxed at the corporate rates which can be less than the personal rates. If you sell assets from a C -Corp and then want the money for yourself, it will be taxed twice - once in the corp and once personally. But if you sell the entire business, you get the lowest possible tax rate, capital gains tax, currently 15%.

In short if you will have early losses and need liability protection stay an S-corp. If you will have a substantial business with lots of profits especially early on, do a regular C Corp. If you're dabbling here and have no real expectation of a meaningful business - don't spend any more money on making the conversion.

Good Luck,
Dana B - President
www.thebarfieldgroup.com

Answer 2

The most obvious difference is that if you convert to an S-Corp your gains or losses would flow to your personal return rather than a C Corp which files their own return as a stand alone entity.

Also check out this website:
http://library.findlaw.com/2000/May/1/130239.html

There are a lot of tax issues to consider depending on the situation.

Answer 3

In a C-Corp, there is double taxation (company and it's owners are taxed). In an S-Corp, the owners pay taxes once (individually on their personal income taxes).

I don't answer a question unless I think I can provide the "best answer." So, if you have additional questions, contact me.