Entrepreneurs in Florida know that one of the biggest decisions they face when establishing a new company is what type of operational structure they will use. From control and decision making to taxation, there are many things that are influenced by this choice. It is also important for executives and leaders to know that they have the option to change their election if their business needs warrant it. One example is moving from a C corporation structure to an S corporation structure.
According to 360 Degrees of Financial Literacy, taxation is often a reason that people migrate from a C to an S corporation. A C corporation pays business taxes and then its shareholders pay personal taxes on their dividends earned. This double taxation is avoided with an S corporation in which the business itself pays no income taxes. Instead, it utilizes a pass-through model in which shareholders only pay taxes via their personal returns.
In order to migrate from a C to an S corporation, the business must meet all of the requirements for an S corporation. This includes having no more than 100 shareholders and only offering certain types of stocks. There are also specific requirements about who can be a shareholder. For example, an individual who is not a U.S. citizen or permanent resident may not be eligible to own shares of an S corporation. All shareholders must also provide written approval of the migration.
The Journal of Accountancy also suggests that business owners who may want to gift any portion or all of their company to another party may not find it useful to move to an S corporation model because of the impact on the fair market value of the company.