S Corp vs C Corp

September 09, 2024

by a searcher from The University of Georgia - Terry College of Business in Denver, CO, USA

From an investor's perspective, is it better to have the passthrough tax advantages of an S corp, or the advantages of preferred equity at the expense of C corp taxes?

As I understand it, one requirement of an S corp is to have only one class of shares. That would rule out the ability to offer preferred equity separate from common shares. (Or is there a way to have one's cake and eat it too by structuring the preferred equity in such a way that it satisfies the "one class of shares" requirement of an S corp?)

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Reply by a searcher
from University of Virginia in Walla Walla, WA 99362, USA

For my latest transaction I choose an S Corp as I'm the only investor (with my spouse). Without outside equity, it's super efficient as I can pay myself a meager salary, then distribute excess cash flow at ordinary tax rates without all the payroll taxes (~10% less). It creates a meaningful delta in outcomes. I'm not worried about a future sale as the buyer will just buy the assets anyway.

If I were to bring on investors and wanted to "promote" there investment, I could use a bonus incentive structure to do that as a work around. It's not perfect, but it's doable. You basically have to use compensation as the adjustment factor as all distributions have to be equal across the owners.

Reply by a professional
from University at Albany, State University of New York in Delray Beach, FL, USA

Chas, I recommend a C Corp as the holding company and then wholly owned LLC for each acquisition. That should give you all the flexibility you need, while protecting the C Corp from anything that happens at the LLC level. The entrepreneurs I partner with raise capital at the holding company level and/or the operating company level depending on business needs, cost of capital and investor demand.

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