Key Steps and Considerations for US S Corp Converting to C Corp

How to Successfully Convert an S Corporation to a C Corporation A Comprehensive Guide to the Process and Key Considerations

In the development of U.S. businesses, the choice of corporate structure has a profound impact on tax obligations, liability exposure, and future financing capabilities. Many startups initially choose to register as S Corporations S Corps to benefit from pass-through taxation, thereby avoiding double taxation. However, as business operations expand, investors come on board, or plans for going public emerge, more entrepreneurs are considering converting their companies into C Corporations C Corps. This article provides a systematic overview of the process and key considerations involved in transitioning from an S Corp to a C Corp, based on recent corporate transformation trends and policy updates.

1. Why Convert an S Corporation to a C Corporation?

According to the latest data released by the IRS in 2025, over 17% of S Corporations have transitioned to C Corporations within the past three years. This trend is particularly evident among tech startups and companies preparing for multiple rounds of fundraising. The primary motivations include

Attracting External Investment C Corporations are more attractive to venture capital firms because they allow for multiple classes of stock, simplifying equity distribution.

Greater Tax Flexibility Although C Corporations face double taxation, the reduction in the U.S. corporate tax rate to 21% has made this structure more favorable in certain scenarios.

Enhanced Employee Incentive Programs C Corporations can more easily implement equity-based incentive programs, helping retain key talent.

Expansion and IPO Readiness If a company plans to go public or be acquired, the C Corporation structure aligns better with capital market standards.

2. Basic Steps to Convert an S Corporation to a C Corporation

1. Shareholder Approval and Internal Resolutions

All shareholders must formally approve the change through a resolution. Typically, approval requires more than 50% of shareholder votes, although exact thresholds depend on the company’s bylaws.

2. Filing Changes with the State

Most states allow S Corporations to convert directly to C Corporations without dissolving the entity. For example, in California, a company simply needs to file a Statement of Information Change in Status with the Secretary of State to complete the legal restructuring.

3. Submit Form 8832 to the IRS

While conversion from an S Corp to a C Corp automatically takes effect at the federal level unless otherwise elected, it is advisable to proactively submit IRS Form 8832 Entity Classification Election to formally revoke S Corporation status and confirm the new classification as a C Corporation. This helps prevent confusion during future tax filings.

4. Amend Corporate Documents

Update the Articles of Incorporation and Bylaws to reflect the new C Corporation structure, especially regarding shareholder rights and board composition.

5. Notify Third Parties

Inform partners such as banks, suppliers, customers, and insurers about the structural change. Contracts may need to be re-signed or credit terms adjusted accordingly.

3. Tax Implications and Transition Planning

1. Transition Period Tax Treatment

Upon termination of S Corporation status, the company enters a new tax year. Important considerations include

Income earned before the S Corporation ends must be reported separately.

The new C Corporation tax year begins on the date of conversion.

Proper handling of the Accumulated Adjustments Account AAA is essential to avoid disputes with the IRS.

2. Asset Revaluation and Depreciation Adjustments

Certain assets may require reassessment of book value, especially in cases involving mergers or acquisitions. Under IRS Section 338, some conversions may be treated as asset purchases rather than stock purchases, allowing for increased depreciation deductions.

3. State Tax Variations

Tax policies differ significantly across states. For instance, New York imposes an additional minimum fee on C Corporations, while Florida maintains a zero corporate income tax rate. Companies should consult local tax advisors to optimize their post-conversion tax strategy.

4. Common Misconceptions and Risk Alerts

Irreversibility Myth

Converting from an S Corporation to a C Corporation is reversible. However, returning to S Corporation status requires strict conditions, including unanimous shareholder consent and no non-resident shareholders.

Cash Flow Impact Overlooked

The C Corporation model may result in double taxation when profits are distributed to shareholders. Businesses should carefully evaluate their cash flow dynamics before making the switch.

Underestimated Compliance Costs

C Corporations are subject to more complex financial reporting and audit requirements, especially for publicly traded or large private entities. Regular board meetings and detailed meeting minutes are also mandatory.

5. Real-World Example TechStart Inc.’s Successful Conversion

According to a June 2025 report by The Wall Street Journal, Boston-based AI startup TechStart Inc. decided to convert from an S Corporation to a C Corporation after completing its Series B funding round. The founder explained, We wanted to bring in more strategic investors and prepare for a potential IPO. The C Corporation structure gives us greater flexibility in equity design and financing terms.

With assistance from a professional accounting firm, TechStart completed the structural change in just one month. The CFO emphasized that proactive planning was crucial We assessed the tax implications and communicated thoroughly with existing investors to ensure no party was negatively impacted.

6. Conclusion

Converting an S Corporation to a C Corporation is a pivotal decision in a company's lifecycle. It goes beyond a simple legal formality-it reflects a shift in strategic direction. As markets evolve and capital structures become more complex, more companies are seeking flexible and scalable organizational frameworks. Before proceeding with such a change, business owners should fully understand the procedural steps, tax consequences, and long-term operational costs. Working closely with experienced legal counsel and accounting professionals to develop a comprehensive transition plan is essential to ensuring stability and sustainable growth in the next phase of development.