S Corp Explained - and why people like them for Acquisitions with Kevin Henderson SMB Law Group
November 02, 2022
by a professional from Northern Arizona University in Tucson, AZ, USA
November 02, 2022
by a professional from Northern Arizona University in Tucson, AZ, USA
from Harvard University in Lynbrook, NY 11563, USA
For one, with some exceptions, you can't have an entity shareholder of an S corp (so you and investors need to own it directly). That also means you can't be acquired by an entity without either dissolving the S corp or doing an asset sale.
S corps also can't have different ownership rights, so all shares/interests in the S corp need to have the same rights (e.g., no preferred returns, return of capital, other bespoke rights).
If you violate an S corp limitation, you can inadvertently terminate your S corp, which makes it a C corp, which you generally don't want to be because of double taxation. In practice, it may be rare that the IRS audits you and says gotcha =, but an acquirer doing their diligence would be wary if it caught the issue because of the tax exposure.
The tax savings only accrue once you have substantial income, so say in the example in the video, if you have $1M in income and you take a 100k salary in the S corp (which for $1M in income is probably too low of a salary IMHO), you'll probably save something like $40k in taxes. It's not insignificant, but you don't necessarily want the tail wagging the dog. You could potentially lose well more than the savings to a buyer who's wary of your S corp compliance for instance.
(You could always start with a partnership LLC (or single member LLC) and convert to an S corp once you determine you'll actually have savings.)
I'm not saying it never makes sense, but there's definitely hairiness to it.
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA