Business owners often choose an S corporation (S corp) for its pass-through taxation benefits and simpler compliance requirements. However, as businesses grow, the limitations of an S corp structure can become restrictive. At this stage, some owners consider an S corporation to C corporation conversion.
While this process can be complex, it may offer advantages such as better fundraising opportunities, flexibility in issuing multiple stock classes, and potential tax savings under certain conditions.
If you’re unsure whether your business should switch, you’re not alone. Owners often wonder if the move is worth the extra compliance and corporate tax.
In this blog, we will explain the C corporation conversion to S corporation process in reverse, why businesses convert, the tax effects you need to know, and whether it’s the right move for you.
What Does “Revoking S Corp Election” Mean?
When you choose to become an S corporation, you file an election with the IRS. This status gives you certain tax advantages, such as pass-through taxation. But if you later decide you want to change, you must revoke that election.
Revoking S corporation status means telling the IRS that your company no longer wants to be taxed as an S corporation. Once revoked, your business will be treated as a C corporation for tax purposes.
The revocation must be filed with the IRS, usually by sending a signed statement with consent from more than 50% of shareholders. Timing matters too; if you file by March 15, the change applies for the current tax year. Otherwise, it applies starting next year.
Read: Has Your Partnership Or S-Corp Received A Huge Late Filing Penalty?
Why Convert from S Corp to C Corp? (Pros & Cons)
Not every company should make this switch. To understand if an S corporation to C corporation conversion makes sense, let’s look at the trade-offs.
S-Corp Advantage:
- Pass-through taxation: S corporations avoid double taxation. Income flows directly to shareholders’ personal returns. This often lowers overall tax when profits are modest.
- Simpler tax reporting: Filing requirements are lighter compared to C corps. You don’t deal with complex layers of corporate tax.
- Ownership limits encourage control: With fewer shareholders allowed (a maximum of 100), owners keep tighter control of the business.
If you convert, these benefits disappear. Your income will be taxed at the corporate level, and shareholders face tax again on dividends.
C-Corp Benefits:
- Access to investors: Venture capital and institutional investors almost always prefer C corps. They allow more complex stock structures.
- Unlimited shareholders: No restriction on the number or nationality of shareholders. Foreign investors can participate.
- Stock options and employee incentives: C corps can issue multiple classes of stock, making it easier to offer competitive compensation packages.
- QSBS (Qualified Small Business Stock) exclusion: Investors may exclude up to $10 million in capital gains if the stock is held for five years. This is one of the biggest tax benefits available.
Drawbacks of Conversion
- Double taxation: Corporate profits are taxed once at the company level and again when distributed as dividends.
- Increased compliance burden: C corps are required to have board meetings, keep a record of minutes, and report on additional requirements.
- Reduction in income distribution flexibility: C corps do not allow the distributions of profits to pass through the hands of the owners as in the case of S corps, since the profits of C corps get locked at the corporate level.
The Process: How to Convert Your S Corp to a C Corp
Before you make this important switch, you must know the exact steps the IRS expects and how timing affects your tax year. The outline below breaks the process into clear actions so nothing gets overlooked. Here’s a thorough, step-by-step outline of our conversion process:
Step 1: Shareholder Consent
A majority of shareholders (over 50%) must consent to revoke S corporation status.
Step 2: File Revocation Statement
The corporation files a revocation statement with the IRS Service Center where it originally filed Form 2553 (S election). The statement must include:
- Corporation name, EIN, and address
- Number of shares outstanding and date of revocation
- Signatures of authorized persons
Step 3: Choose Effective Date
- If filed by the 15th day of the third month of the tax year, revocation is effective retroactive to the start of the year.
- If filed later, it is effective on the first day of the next tax year.
Step 4: File Short-Year Returns
For mid-year conversions, file:
- Form 1120-S (S corp return) covering the period until revocation
- Form 1120 (C corp return) covering the period after revocation
Some states require additional filings to recognize the new C Corp status.
Step 5: Adjust Accounting and Compliance
Transitioning to a C corp changes accounting rules for items like charitable contributions, shareholder accruals, fringe benefits, and capital losses.
It may seem simple, but getting help from professionals, such as the trusted Hopkins CPA Firm, ensures everything is handled correctly.
→ Book a consultation call today.
Key Tax Considerations & Timing Rules
Tax rules can be the trickiest part of an S corporation to C corporation conversion. Here are some you should understand.
Section 481(a) Adjustment
- This rule ensures no income is skipped or double-counted during the conversion. For example, prepaid expenses or accounts receivable may need to be recognized differently. Sometimes, the IRS lets businesses spread the adjustment over several years to ease the burden.
Stock Basis Treatment
- In an S corp, stock basis tracks how much you’ve invested plus retained earnings passed through. After conversion, the basis resets because profits stay inside the corporation. This affects how much tax shareholders pay on future dividends or stock sales.
QSBS Eligibility Post-Conversion
- The Qualified Small Business Stock (QSBS) rule is a huge tax advantage. But only C corp stock qualifies. Shares issued after the S corporation to C corporation conversion may be eligible. The five-year holding period starts from the date of issuance, not conversion.
Governance & Compliance Changes
After you have carried out an S corporation to a C corporation conversion, the rules of governance change:
- Formal Board of Directors: You have to form and maintain a board that meets regularly.
- Tighter record keeping: Minutes, resolutions, and records of shareholders have to be well-maintained.
- Yearly corporate filings: C corps file Form 1120 on an annual basis, as opposed to pass-through filings.
- Regulatory review: You may be subject to SEC and state securities regulations if you intend to issue a capital increase or stock.
Although these will seem like a huge burden, this will also earn your business some credibility on the part of investors and lenders.
Comparison Table: S Corp vs C Corp vs LLC
Before choosing the right structure, it is helpful to assess how each option compares in key areas such as taxation, ownership, and compliance. This table gives you a clear snapshot to make smarter decisions.
| Feature | S Corporation | C Corporation | LLC |
| Taxation | Pass-through | Double taxation | Pass-through (default) |
| Shareholders | ≤ 100, U.S. only | Unlimited, global | Unlimited |
| Stock Options | Limited | Flexible | Not standard |
| QSBS Eligibility | Not eligible | Eligible | Not eligible |
| Compliance | Moderate | High | Low |
This shows why no single structure is best for everyone.
Who Should Consider Conversion? Use Cases
Not all businesses benefit from an S corporation to C corporation conversion. It’s most useful if:
- You want to raise venture capital.
- You plan to go public in the future.
- You want to issue stock options to employees.
- Your business earns enough that the corporate tax rate is lower than your personal tax rate.
For smaller firms that want simplicity, staying as an S corporation might be smarter.
Convert Confidently With Hopkins CPA Firm Support
Switching from an S corp to a C corp can change how your business pays taxes, raises money, and plans for growth. It’s not the right move for everyone, but for companies looking to attract investors or go public, it’s often necessary.
Hopkins CPA Firm can help you through every step of an S corporation to C corporation conversion. Here’s how we make the process smooth:
- Review your company’s financials to see if conversion makes sense
- Handle IRS filings and revocation paperwork correctly
- Guide you on Section 481(a) adjustments and stock basis rules
- Advise on QSBS eligibility and long-term tax strategy
- Manage compliance so you stay in good standing with federal and state laws
We combine experience with personal attention to give you the best outcome. Let’s make your C corporation conversion to an S corporation decision the right one for your future.
Contact us today and get expert help from the team that knows how to keep businesses ahead.
FAQs
Does converting require a new EIN?
- No. When you convert, the business typically keeps the same EIN. The IRS recognizes this as a change in tax status, not a new business. That means your contracts, licenses, and banking details remain intact.
Can you revert back to S corp status?
- Yes, but there’s a five-year waiting period before you can re-elect S corp status. This rule prevents frequent switching for tax benefits. Planning ahead with tax professionals avoids regret later.
How does conversion affect stock basis and distributions?
- Once converted, earnings stay at the corporate level. Distributions become dividends, taxed at the shareholder level. Stock basis changes, so shareholders must track basis carefully for future sales or dividend reporting.
What impact on Section 481(a) adjustment?
- The Section 481(a) adjustment ensures no income is lost or taxed twice. It applies to timing items such as prepaid expenses or accrued revenue. In many cases, businesses spread this adjustment across four years.
Will conversions disqualify QSBS?
- No, but only stock issued after conversion qualifies. If investors receive shares post-conversion, the five-year QSBS holding period begins then. Shares held during S corp years don’t count for QSBS purposes.
