We previously addressed the reasons why many small businesses choose the S corporation as the preferred form of entity. This month, we will discuss the advantages of the C corporation in the right circumstances. From a liability standpoint, S corporations and C corporations provide identical legal protection to the owners.
Differences arise from tax circumstances.
If the corporation elects S status, company income will flow through to the individual shareholders, resulting in only one level of taxation. An IPO will quickly shoot the corporation past the maximum number of shareholders allowed for an S corporation. An S election becomes invalid upon a merger with a C corporation. The Internal Revenue Code provides several incentives to venture capitalists investing in a C corporation. The investor purchasing QSB stock may roll over any gain from the sale of that stock into new QSB stock within 60 days tax free if it was held for more than six months prior to sale.