Downsides of registering as C-Corp but electing S-Corp tax status for startups?

Thanks for that explanation! When you mention the "deemed liquidation" for tax purposes, can you explain a bit more about what that means practically? Would I be hit with a big tax bill just for switching from S to C status? Also, would there be a mandatory waiting period before I could switch back to S-Corp status if things didn't work out with investors?

The "deemed liquidation" doesn't mean you'll automatically face a huge tax bill. What happens is the IRS treats it as if the S-Corp distributed all its assets to shareholders, who then contributed them to the new C-Corp. If the fair market value of your company assets exceeds their tax basis, this could create taxable gain. For early startups with limited assets or even losses, this may have minimal impact. If you revoke S status, you generally cannot re-elect it for 5 years without IRS permission. This is a significant restriction that prevents companies from frequently switching to optimize taxes. The permission isn't automatically granted, so it's not something to rely on as a fallback plan.

How does taxr.ai handle the analysis when you have intellectual property involved? We have some patents pending and I've heard IP can complicate the tax situation when switching entity types. Did your situation involve any IP considerations?

Is it actually legit? I've tried so many "tax helpers" that just give generic advice you could find on any accounting blog. Does it actually look at YOUR specific numbers and give personalized recommendations? Or is it just another glorified quiz that spits out templated responses?

It actually handles IP considerations really well. When I uploaded our financial data, I included notes about our proprietary technology, and the analysis specifically addressed potential IP valuation issues during a transition. It recommended documenting fair market value of the IP before any conversion to minimize tax exposure. For your question about legitimacy, it's definitely not a generic quiz. You upload actual financial statements and tax returns, and it runs real calculations with your numbers. I could see exactly how different decisions would impact my specific tax liability - with actual dollar amounts based on our revenue, expenses, and growth projections. It was way more detailed than anything I'd found before.

Wait, how does this actually work? Do they somehow get you to the front of the IRS phone queue? That seems impossible given how the IRS phone system operates. Does it cost money?

Sorry, but this sounds fishy. The IRS doesn't give "exceptions" easily and certainly not through a phone call. Any IRS agent worth their salt would tell you to get a written determination letter. I'd be very cautious about making business decisions based on a phone conversation that isn't documented.

It's not about skipping the line - they use an automated system that continuously redials and navigates the IRS phone tree for you. When they finally get through, you get a call back and are connected with the agent. You don't have to sit on hold for hours. Regarding documentation, you're absolutely right that a phone conversation isn't the final word. The agent walked me through the process of requesting a Private Letter Ruling for our specific scenario, which is the official written determination. The call saved me from submitting an incomplete PLR request that would have been rejected. They outlined exactly what documentation we needed to include with our submission.

Thanks for sharing your experience! Did you face any issues with the timing of revoking your S election? I've heard there might be optimal times during the fiscal year to make the switch. Also, did you experience any unexpected costs during the conversion process that I should budget for?

Timing definitely matters. We revoked our S election mid-year which created some accounting complexity with a partial-year S-Corp return and partial-year C-Corp return. In retrospect, doing it at year-end would have been cleaner. As for unexpected costs, the biggest ones were accounting fees for handling the more complex tax filings and legal fees for updating our shareholder agreements. Our accountant charged about $2,800 for the additional work, and legal fees were around $4,000. We also needed to update our capitalization table and stock certificates, which wasn't expensive but took more time than expected. Budget at least $7-8K for a smooth transition.

In theory, you could create a two-entity structure - an S-Corp for operations that pays management fees to a C-Corp holding company where investors put their money. But honestly, it's overly complicated and most serious VCs will run away from this setup. The legal and accounting overhead usually erases any tax benefits. We tried something similar and abandoned it after our Series A investors balked at the complexity.