As California businesses grow after their formation, they may find that they want to change their type of corporate registration. The Tax Cuts and Jobs Act, passed in December 2017, made it a profitable choice for many S corporations to become C corporations instead. The tax reform bill cut the highest tax rate for C corporations from 35 to 21 percent. In addition, pass-through businesses like S corporations also received a limited 20 percent tax deduction. In order to change from an S corporation to a C corporation, a majority of shareholders must consent to the change.
Different types of corporations may require different types of accounting. For example, some S corporations that become C corporations must change from an overall cash accounting to an overall accrual method of accounting. In the first six-year period after the change, the Internal Revenue Service said that it can handle the ensuing adjustments ratably during this time. The same is true for corporations that would be allowed to continue to use the cash method; if they switch to the accrual method, they can account the adjustment over the ensuing six years.
There are a number of reasons why people may choose a particular type of structure when forming a new business. For example, entrepreneurs could choose to create a business corporation, partnership, LLP, LLC or sub S corporation. Each of these structures provides certain advantages while each carries some disadvantages.
An entrepreneur can select the structure that is best suited to his or her management plans, vision for the future and existing capital. When people go through the business formation process, they may wish to work with an attorney to make decisions. A lawyer might provide advice about the type of entity to select and why it could be well-suited for an entrepreneur’s needs and interests.