Search/private equity investments - better in S-Corp or LLC (S-election)?

February 09, 2023

by an investor from University of Oxford in San Francisco, CA, USA

My CPA is worryingly unhelpful here other than telling me there's a difference when 'moving assets out'.

Thank you for any input.

I have a 'spare' S-corp already. Other considerations I'm becoming aware of:
QSBS is not for asset sales just stock sales and C-corps only but they suffer from double taxation.
S Corporations may be subject to an additional passive income tax but only if once a C corporation.

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Reply by a searcher
from University of Pennsylvania in Miami, FL, USA

Note that I'm not a CPA or an attorney and not giving professional advice, just sharing based on my experience. On the C vs S Corp question: We've used the C Corp to take advantage of the QSBS benefit you mention. The thing to consider when deciding about C Corp vs and S Corp or LLC is whether you plan to invest heavily in growth in the first few years (I.e. not have a lot of profits that would be taxed) or if you want to run the business more steady and focus on generating returns sooner. If your aim is to invest in growth to grow the equity value then sell and get the bulk your return at the exit, C Corp makes sense being double taxed on small profits for a few years then paying no cap gains on a huge gain is a good trade. If your aim is to generate returns steadily and aren't sure if/when you plan to sell then S Corp may be the way to go. Other miscellaneous considerations on C Corp include: (1) Have to have a board/little bit more governance overhead, (2) Unlocks other things like the ability to invest from your 401K, (3) the QSBS benefit requires a 5-year hold and a stock sale, (4) lot more (infinite!) flexibility on how you structure stock classes vs more limitations on S Corps and LLCs, (5) there are some limitations on types of businesses that can get the QSBS benefit (biggest limitation I remember is that professional services-type businesses like law and accounting firms generally don't qualify, but speak to a professional on this).

Reply by a professional
from Villanova University in West Chester, PA, USA

Thanks so much ^redacted‌ for the tag! As a number of folks have mentioned, there are numerous considerations, and it's really hard to provide an accurate recommendation based on the limited information. I have a guide comparing the pros & cons that you can view here. https://drive.google.com/file/d/1TJgkKg7YfpWO4R2Xu_dKNE23gI1TEBcU/view?usp=sharing - it's pretty high level and doesn't include tax liabilities as those differ drastically on circumstances and are in the accounting realm. It should be a decision made with advice from your attorney & accountant. I would be happy to provide a complimentary consultation if you would like to discuss this further. My email is redacted or you can complete this questionnaire to schedule a call: https://www.deanstreetlaw.com/potential-client-questionnaire

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