C Corp Conversions & Transitions 2025

Executive Summary

The decision to convert to a C Corporation is pivotal. While C Corps offer a flat 21% tax rate and access to unlimited investors (VC/IPO), they impose a second layer of tax on distributions.

For S Corporations, the transition opens a critical window: the Post-Termination Transition Period (PTTP), allowing tax-free distribution of old profits. For LLCs, conversion acts as the "original issuance" date for QSBS, potentially unlocking millions in tax-free gains upon exit.

The Upside

Growth Capital: C Corps are the only vehicle for Venture Capital. QSBS (Sec 1202) offers 100% tax-free exit on stock held 5+ years.

The Lock-In

5-Year Rule: Once you revoke S status, you generally cannot re-elect it for 5 years. Re-electing later triggers Built-in Gains (BIG) Tax.

The Window

PTTP: You have ~1 year after S Corp termination to distribute accumulated AAA tax-free. Missing this turns cash into taxable dividends.

Converting S Corp to C Corp

Revocation Mechanics

Requires consent of >50% of shares. File by March 15 (for calendar year) to be retroactive to Jan 1. Otherwise, effective date is prospective.

The "AAA" Escape Hatch

1

Accumulated Adjustments Account (AAA)

This is money you already paid tax on but haven't withdrawn. It sits in the company.

2

The PTTP Window

For ~1 year post-conversion, you can distribute this AAA cash Tax-Free.

3

The Deadline Expiry

Once PTTP ends, AAA disappears. Any distribution becomes a Taxable Dividend (Double Tax).

Converting LLC to C Corp

Commonly done to attract VC funding. Can be done via "Check-the-Box" (Form 8832) or Statutory Conversion.

Check-the-Box (Form 8832)

Method: Tax election only. Legal entity remains an LLC.
Result: Deemed contribution of assets for stock (Sec 351).
Risk: Sec 357(c). If Liabilities > Basis, immediate gain is triggered.

Statutory Conversion

Method: File conversion docs with State. Legal entity becomes Inc.
Result: "Assets-Over" reorganization. Cleaner for investors.
QSBS: Clearly establishes "Original Issuance" date for stock.

The QSBS Opportunity

The biggest tax incentive in the code. Available only to C Corporations.

Section 1202 Exclusion

If you hold C Corp stock for 5 years, you can exclude the greater of $10 Million or 10x Basis from federal tax upon sale.

Conversion Impact

LLC to C Corp: Conversion date starts the 5-year clock. Basis for 10x cap is FMV at conversion.
S Corp to C Corp: Warning: S Corp stock is NOT eligible. Only new stock issued after conversion qualifies. Old stock remains ineligible.

Critical Tax Traps

Section 357(c) (Negative Equity)

If your LLC has debt exceeding its asset basis, converting to a Corp triggers Taxable Gain on the difference.

The "Flip-Flop" BIG Tax

If you convert S -> C, then later C -> S, you trigger a new 5-year Built-in Gains Tax period on all appreciation that occurred during the C Corp years.

Interactive: Conversion Outcome Simulator

Compare the long-term value of staying Pass-Through vs. Converting to C Corp. Weighs annual tax savings against the "Exit Tax" penalty.

Financial Projections

Annual Net Profit ($)

Projected Exit Price (Year 5) ($)

Will stock qualify for QSBS? (Tech/Mfg only)

5-Year Outcome Analysis

Annual Tax Load

Pass-Through (~30%) vs C Corp (21%)

S: $0

C: $0

Tax on Exit

Single vs Double Layer