When a business owner decides to sell the company, there are different scenarios to consider ensuring the sale benefits the seller as much as possible. It’s imperative that the owner should understand the tax implications and how they relate to the company’s corporate structure. When starting a business or changing your business structure, one of the most common options business owners evaluate is whether to form an S corporation or C corporation. These are the two most common ways to incorporate, and the choice really depends on your business goals.

1. S corporation vs. C corporation
How They Differ and How to Decide What’s Right For You

2. 2
C CORPORATION DEFINED
*BizFilings: The Business Formation Experts
• Expensive to set up
• Income is more heavily taxed
• Pays taxes on profits
• Stockholders pay taxes on
dividends
• Limited liability
• Ability to raise money
• Perpetual existence
• Employee benefits
• Tax advantages
• Unlimited owners
• Easy transfer of ownership
• Unlimited life
• Owners take reasonable
salaries
• Owners are not automatically
taxed on business earnings
• Retained earnings inside the
business
• Credibility
• Lower audit risk
• Tax deductible expenses
• Self-employment tax savings
KEY BENEFIT: C corps are more flexible than S corps in terms of number of owners they can
have and who can be an owner.
C CORP is the most common corporation type, but it isn’t always the top choice for small business
owners. C corps provide limited liability protections to shareholders and offers greater tax advantages
because of an expanded ability to deduct employee benefits.*
ADVANTAGES DISADVANTAGES
*IRS: C Corporations

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S CORPORATION DEFINED
*IRS: S Corporations
• Limited liability protection
• Easy transfer of ownership
• Unlimited life
• Pass-through taxation in the corporate form
• Credibility
• Pro-rata distribution of profits
• Income and losses passed through to
shareholders
• Self-employment tax savings
KEY BENEFITS OF FORMING AN S CORP
• Electing S Corp status with the IRS allows for pass-through taxation of the corporation’s profits.
• S Corps must still file corporate tax returns, but they do not pass taxes at the corporate levels.
• The S Corp’s profits are passed through to the individual tax returns of the shareholders, and
taxes are paid on those profits at the individual tax rate
S CORPS are companies that have elected to pass corporate income, losses, deductions, and credits
through to shareholders for federal income tax purposes.*
ADVANTAGES

4. 4
C CORPS, S CORPS & ESOPS. OH MY!
By law, an ESOP is a federally tax exempt entity. As such, the pro rata earnings of an S Corp allocable
to an ESOP, as a corporate shareholders, are exempt from federal income taxes.*
*ButcherJoseph Blog: ESOP Tax-Deferred Rollover
In other words, earnings that would have otherwise been used to pay income
taxes can be retained in the business, or used for capital expenditures that
enhance value. It is this tax savings that make the ESOP shareholder unique and
different than any other corporate shareholder.
In addition to tax savings at the corporate level, selling to an ESOP affords individual shareholders
attractive tax benefits.
ü Creating an ESOP-owned C Corp is accomplished through the purchase of company stock
by the ESOP from selling shareholders.
ü Section 1042 of the IRC permits business owners who sell a minimum of 30% of their
company stock to an ESOP to defer federal taxes due on the transaction.

5. 5
C CORP vs. S CORP: THE SIMILARITIES
Limited Liability Protection: Both offer limited liability protection, so shareholders are
typically not personally responsible for business debts and liabilities.
Separate Entities: Both the S Corp and C Corp are separate legal entities created by a
state filing.
Filing Documents: Formation documents must be filed with the state and are the
same for both C Corps and S Corps.
Structure: Both have shareholders, directors and officers. Shareholders are the
owners of the company and elect the board of directors.
Corporate Formalities: Both are required to follow the same internal and external
corporate formalities and obligations, such as adopting bylaws, issuing stock, holding
shareholder and director meetings, filing annual reports, and paying annual fees.
*BizFilings: The Business Formation Experts

6. 6
C CORP vs. S CORP: THE DIFFERENCES
C corporations: C-Corps are separately taxable entities. They file a corporate tax return and pay
taxes at the corporate level. They also face the possibility of double taxation if corporate income is
distributed to business owners as dividends, which are considered personal income. Tax on
corporate income is paid first at the corporate level and again at the individual level on dividends.
S corporations: S-Corps are pass-through tax entities. They file an informational federal return, but
no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-
through” the business and reported on the owners’ personal tax returns. Any tax due is paid at the
individual level by the owners.
Personal Income Taxes: With both types of corporations, personal income tax is due both on any
salary drawn from the corporation and from any dividends received from the corporation.
*BizFilings: The Business Formation Experts
Taxation is often considered the most significant difference for small business
owners when evaluation C-Corps vs. S-Corps.
Corporate Ownership: C-Corps have no restrictions on ownership, but S-Corps
do. S-Corps are restricted to no more than 100 shareholders, and shareholders
must be US citizens.

7. 7
SELLING AS A C CORP VS. S CORP
SELLING AS A C CORP
• Unless the owner filed an S election, most
corporations are C Corps by default. C
Corps are taxed on their own income at the
current corporate tax rate.
• When it comes time to sell a C Corp,
owners can either sell the assets or the
stock.
• For tax purposes, owners may find
it more advantageous to sell stocks,
rather than assets since an owner’s
sale of stock would only incur a
single tax.
• Buyers may prefer to buy assets over
stocks.
• True successor liability accompanies
the purchase of stock.
SELLING AS A S CORP
• Owners typically form S Corps to pass on
corporate income, losses, deductions, and
credits to their shareholders.
• By electing this status, shareholders report
the flow-through of income and losses on
their individual tax returns, ensuring the S
Corps avoids double taxation.
• S Corp companies must be a domestic
corporation that only issues one class
of stock and cannot have more than
100 shareholders.

8. 8
Understanding the difference between selling a C Corp and an S Corp empowers
owners to prepare their company for a sale that meets all of their objectives. An
experienced finance professional can structure the transaction to reduce the selling
shareholder’s tax liability and ultimately provide more liquidity for the seller.
Interested in working together? Let’s chat!
o Comparing the Sale of C Corps & S Corps
o The Tax Benefits of Different Corporate Structures
o ESOPs in C Corps
o ESOPs in S Corps
Read more about S Corps and C Corps at a blog post below: