Maintain s-corp status?

searcher profile

December 18, 2020

by a searcher in Los Angeles, CA, USA

I am reviewing an opportunity that is an s-corp and trying to project out taxes under new ownership. If I am not bringing outside investors into the deal, and existing ownership would remain at the common equity level only - should I just assume that maintaining s-corp status and only being taxed (at ordinary income tax levels) for any distributions I make (either to myself or other common holders) is the best path forward? In other words, besides having the ability to have preferred shareholders what other advantages does c-corp status allow me? The obvious disadvantage is the double taxation ...

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commentor profile
Reply by a professional
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA
Entity choice is very important and 2021 may bring more tax law changes that will need to be considered. Buying assets or structuring as a deemed asset sale is most advantageous to the Buyer. While a section 338(h)(10) election is an option for a deemed asset sale, I try to avoid them because they require the S-Corp to have a valid S election. Rarely can I have complete comfort the Sellers did not violate the S-Corporation rules during the time the S election was effective. Even if you have to buy S-Corp stock there are structuring options that can be done simultaneously with closing that would allow you to maintain the S-Corp and still bring in investors that are not individuals and allow you to have different types of equity.
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Reply by an intermediary
from Indiana University at Bloomington in Carmel, IN, USA
S-Corps are pass through entities, meaning the Taxable income is then divided by ownership and each is given a K-1 to pay taxes on their share. Has nothing to do with the amount of any distributions. Usually at a minimum, enough distributions are given to each shareholder to pay their share of taxes, but if there is no cash to pay out (say it is tied up in A/R as an example) the shareholders have to come up with the $ to pay their taxes. 95% of lower middle market deals, the new ownership prefer S corps if possible.
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