Owners usually decide the S-Corp vs C-Corp question years before a sale is ever on the table. Even so, it’s one of the biggest single factors in what you actually keep from the sale price.
Quick Answer: S-Corp vs C-Corp When Selling
In the S-Corp vs C-Corp comparison, C-corps face potential double taxation on an asset sale — corporate-level tax, then tax again when the company distributes proceeds to shareholders. S-corps generally pass gains through to owners only once. A recently converted S-corp may still owe built-in gains tax if it’s within 5 years of converting from a C-corp.
Why C-Corps Face Double Taxation
The IRS taxes an asset sale by a C-corp at the corporate level first. When the company then distributes the remaining proceeds to shareholders, the IRS typically taxes that distribution again as a dividend or capital gain — two layers of tax on the same sale.
Why S-Corps Usually Avoid It
As a pass-through entity, an S-corp’s gain on an asset sale generally flows directly to the owners’ personal returns. The IRS taxes it once, at the shareholder level.
The Built-In Gains Trap
If a company converted from a C-corp to an S-corp, it can still owe corporate-level built-in gains tax. That tax applies to appreciation that occurred while it was a C-corp, if the sale happens within 5 years of the conversion date.
Why This Matters Years Before You Sell
This is exactly why entity structure decisions are worth revisiting periodically, not just at the moment you decide to sell. By the time a sale is on the table, some options — like starting the 5-year built-in gains clock — may no longer help in time.
See the IRS guidance on S corporations for the current federal rules. This also interacts directly with the asset sale vs entity sale decision, since entity structure and deal structure compound each other’s tax effects.
FAQ
Does this apply to LLCs too? LLCs are typically taxed as either pass-through entities or corporations, depending on election. The same general principles apply based on that underlying tax treatment.
Can I convert from C-corp to S-corp before selling? You can, but the built-in gains rule means you’d generally need to wait 5 years after conversion for the full benefit on appreciated assets.
Which structure is better for a seller in general? S-corp (or another pass-through structure) is usually more favorable for an asset sale, but every situation is different — review yours with a CPA.
Does an entity sale change this analysis? Yes — the IRS typically taxes entity sales once at the shareholder level regardless of C-corp or S-corp status, which changes the calculus significantly.
When should I get a CPA involved in this decision? Ideally years before a planned sale, since some of the most effective strategies (like the built-in gains timeline) require lead time to be useful.
Want to understand how your entity structure affects your number? Talk to Truforte Business Group.