Research Report: C Corp Conversions & Transitions

Strategic Conversions: Beyond the Rate Cut

The decision to convert from a Pass-Through entity (S-Corp, LLC) to a C-Corporation is one of the most consequential lifecycle events for a private company. While the Tax Cuts and Jobs Act (TCJA) lowered the corporate rate to a flat 21%, the "double taxation" regime of C-Corps remains a hurdle for many.

Core Research Findings

✓
Reinvestment is Key: C-Corps offer a powerful arbitrage opportunity for companies reinvesting >50% of profits, effectively using the 21% rate as a low-cost capital shield.
✓
The QSBS Factor: Section 1202 (Qualified Small Business Stock) can eliminate up to $10M (or 10x basis) in gains upon exit, often outweighing annual tax inefficiencies.
⚠
Timing Risks: Converting too late forfeits the 5-year holding period for QSBS; converting too early triggers unnecessary administrative costs and potential double tax on dividends.

Key Metric

21%

Flat Federal Corporate Tax Rate

Vs. Individual Top Rate

37%

Excluding 3.8% NIIT and State Taxes.

Entity Selection Framework

Interactive guide to common profiles. Click a card to see the recommendation.

Recommendation

Select a profile above

Analysis will appear here detailing the tax implications for the selected business profile.

The Long-Term Tradeoff: Rate Arbitrage

C-Corporations face "double taxation" (once on profits, once on dividends). However, because the corporate rate (21%) is significantly lower than the top individual rate (37%), companies that retain and reinvest earnings can defer the second layer of tax, creating a powerful compounding effect.

Simulation Parameters

Annual Net Profit

Reinvestment Rate: 80%

Distribute All Retain All

Owner State Tax Rate: 5%

Note: Comparison assumes top marginal federal brackets. Pass-through includes QBI deduction limitations for high earners.

Cash Availability Analysis (5 Year Cumulative)

Pass-Through Cash

$0

C-Corp Retained Cash

$0

Analyzing...

The QSBS "Jackpot"

Internal Revenue Code Section 1202

For exit-driven founders, the primary driver for converting to a C-Corp is Qualified Small Business Stock (QSBS). If eligible, founders can exclude the greater of $10 million or 10x their basis from federal capital gains tax upon exit.

Eligibility Checklist

1 Must be a C-Corporation.

2 Assets under $50M at time of issuance/conversion.

3 Hold stock for at least 5 years.

4 Active business (excludes hospitality, finance, law).

Exit Proceeds Simulator

Exit Value:

Insight: Without QSBS, a C-Corp exit effectively suffers double taxation (Corporate tax on asset sale + Individual tax on liquidation), often yielding lower net proceeds than an S-Corp asset sale. QSBS inverts this dynamic.

The Mechanics of Transition

Navigating the "Valley of Death" between entity states.

Legal & Tax Election

State conversion (LLC -> Corp) or Revocation of S-Election.

1

Legal & Tax Election

State conversion or Revocation.

Accounting Cut-off

Close books. Short-year tax return filings.

2

Accounting Cut-off

Books must be closed rigidly. Two short-year tax returns often required for the transition year.

Basis & Capitalization

Determine Sec 351 compliance. Calculate basis in stock.

3

Basis & Capitalization

Sec 351 compliance check.

EntityStrategy

Strategic Conversions: Beyond the Rate Cut

Core Research Findings

Key Metric

Vs. Individual Top Rate

Entity Selection Framework

Lifestyle Business

Venture Scaler

Capital Intensive

Professional Service

Recommendation

Select a profile above

The Long-Term Tradeoff: Rate Arbitrage

Simulation Parameters

Cash Availability Analysis (5 Year Cumulative)

The QSBS "Jackpot"

Eligibility Checklist

Exit Proceeds Simulator

The Mechanics of Transition

Legal & Tax Election

Legal & Tax Election

Accounting Cut-off

Accounting Cut-off

Basis & Capitalization

Basis & Capitalization

AAA Lock-in (S to C)

Built-in Gains (C to S)

LIFO Recapture

State Tax Friction