Can a C Corp Purchase an S Corp? Everything Owners Need to Know for 2025 (and the Costly Mistakes Most CPAs Miss)

Most business acquisitions hit a wall when buyers assume a C Corp can simply buy out an S Corp and keep all tax perks—only to find out the real IRS fallout when it’s too late. The truth is, corporate structure deals create unique tax traps, especially if you’re operating in highly scrutinized states like California. Here’s the real answer (and how to dodge a six-figure IRS misstep).

This guide covers the reality behind C Corp and S Corp acquisition combinations, common pitfalls, critical IRS rules for 2025, and actual savings strategies for every business owner, real estate investor, or entrepreneur facing an ownership change.

Quick Answer: Can a C Corp Purchase an S Corp?

Yes, a C Corp can acquire the stock or assets of an S Corp. However, after the sale, the S Corp status is lost if the C Corp becomes an owner, triggering immediate and long-term tax consequences that most buyers and sellers ignore. The IRS strictly prohibits a C Corp from being a shareholder of an S Corp (see IRS S Corporations guidance). This means any stock bought by a C Corp causes the S election to terminate, leading to both built-in gains taxes and potential double taxation risks. Asset sales avoid this, but introduce their own cost and risk profile.

What Happens If a C Corp Purchases S Corp Shares?

When a C Corp purchases shares of an S Corp, the S Corp immediately loses its S status the moment a disallowed shareholder (like a C Corp) holds shares. The company reverts to a C Corporation for tax purposes—often retroactively to the start of the year—triggering a shift in how all company income is taxed for that year (see IRS S election termination rules).

• Example: If BigGrowth Inc. (a C Corp) acquires 60% of GrowthForce LLC (an S Corp), GrowthForce’s S election terminates instantly. All income earned that year after the purchase is taxed at the corporate C rate (21%), and any distributed profits face double taxation if paid as dividends.

This is a common trap in small-business buyouts. W-2 founders get excited about a payout without realizing their after-tax proceeds may shrink by 20–40% due to this one rule.

KDA Case Study: Two-Partner S Corp Acquisition Goes Sideways

Persona: Two LLC member-owners, $1.2M net income, looking to exit

In 2022, a pair of California consultants (an S Corp with $1.2M in net income) agreed to a buyout with a regional C Corporation. Their attorney failed to highlight that, upon closing, the S Corp status would terminate, and all of their retained earnings would become subject to both C Corp income tax and shareholder dividend tax in the year of sale.

KDA proposed an asset sale structure instead, allowing the owners to recognize long-term capital gain on the sale of business assets (at 20% federal rate) rather than C Corp-level double taxation. The correction yielded an $89,000 net savings in the first year, after paying $15,000 in advisory fees—6X ROI just by structuring the deal correctly.

Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.

How Buyer Structure Changes the Tax Cost (C Corp vs. Asset Purchase)

C Corp Purchase of Stock: Buyers who are C Corps and acquire S Corp stock kill the S election. This subjects any post-acquisition earnings to corporate tax and risks retroactive taxable events for the existing shareholders.

• Trap Alert: If the S Corp holds appreciated assets, the built-in gains tax applies, and distributions post-deal may get taxed twice—once at the C Corp level, once at the shareholder level (see IRS Instructions for Form 1120S).

Asset Purchase: If the buyer (even if a C Corp) purchases only the assets, the S Corp distributes resulting proceeds to shareholders. This frequently results in a one-time capital gains tax event for the selling shareholders—often at a lower effective rate than the double-taxation scenario.

• Example – 1099 Consultant S Corp Exit: If a 1099-based S Corp sells assets for $600K, and original basis is $120K, the resulting $480K gain is subject to capital gains rates. Compare that to a buyout by a C Corp where double-taxation cuts proceeds by 15–25% more.

For a deeper look at entity conversions, profit extraction, and S-to-C Corp election traps (especially for California), check out our full S Corp tax strategy guide.

Why Most Owners Overlook the S Corp Termination Trap (And How to Fix It)

Most business sellers—especially in tech, consulting, and franchising—misunderstand what actually triggers the loss of S Corp status. Key misconceptions include:

• Belief that minority sales (<50%) are safe (FALSE—any C Corp shareholding triggers termination)
• Assuming the S election ‘sticks’ until year-end (FALSE—termination date is immediate)
• Thinking profits up to the sale are always safe from double-tax (FALSE—timing and deal structure matter)

The fix: Use pre-deal due diligence to map every shareholder change, and only close share sales to non-corporate entities. For C Corp buyers, asset purchases or up-front restructuring can preserve the S benefits and minimize the overall tax exposure for all parties.

Pro Tip: Pre-Sale Entity Restructuring Can Cut Taxes by 30%+

“Structuring the sale as an asset purchase and intelligently timing distributions can often save $50,000–$200,000 on a mid-sized deal.”

Ask your deal team about the difference between capital gain and corporate dividend tax rates, and demand a 3-year pro forma analysis under each option before closing. Most CPAs miss this.

FAQ: What If I Already Sold an S Corp to a C Corp?

Q: Can I fix the tax status retroactively?
A: Sometimes—but corrections are limited. If the deal closed as a stock sale, you may need to file an amended return and accept the entity’s move to C Corp status back to the effective date. See IRS correction procedures.

Q: Does California have extra tax traps?
A: Yes. The California Franchise Tax Board aggressively audits entity sales involving change-of-ownership and S Corp status. Review CA FTB S entity rules before closing a deal.

What’s the Best Structure If a C Corp Wants to Buy My S Corp?

• If the buyer must be a C Corp, recommend an asset purchase and distribute proceeds for capital gains treatment.
• If a stock sale is required, consider having individual shareholders or trusts as buyers to preserve S status at closing.
• Get a buy-side and sell-side tax model before signing any letter of intent (LOI).
• Document the intent to elect asset vs. stock treatment in the deal contract.

Red Flag: Common Deal Documents That Trigger Audit Risk

• Unclear asset vs. stock sale provisions
• Failure to clearly list allowed/disallowed shareholders per IRS S Corp rules
• No explicit date when S election ends
• “Silent rollover” shares left in S Corp ownership

These mistakes routinely cost business owners $30,000–$100,000+ in avoidable taxes, especially if discovered after the fact. Always have both sides’ advisors sign off on IRS S Corp termination provisions before finalizing any deal.

Pro Tip: Should You Convert S Corp to C Before the Sale?

In some scenarios, preemptively converting your S Corp to a C Corp before a planned sale to a C Corp buyer can make sense—especially if qualified small business stock (QSBS) benefits apply. However, this is highly technical and should only be considered under direct CPA guidance with full awareness of built-in gains periods and California’s own entity tax rules. See IRS C Corp guidance for reference.

What’s the Difference in Audit Risk?

Deals that improperly terminate S status or misreport built-in gains are red flags for IRS and state audit programs. In 2023, the IRS flagged thousands of entity sale returns for misapplied S election rules. Getting the entity type and sale date right is foundational—don’t rely on your broker or legal team alone. Demand a seasoned tax strategist with recent entity sale experience.

Bottom Line: Do You Want After-Tax Cash or Post-Sale Regret?

Letting a C Corp buy an S Corp via a simple stock transfer is a classic way to pay double tax and potentially face FTB penalties—especially for California sellers. If you’re thinking of selling your S Corp, get a specialist on board before agreeing to terms. It could be the difference between retiring comfortably and writing a surprise check to the IRS.

This information is current as of 9/30/2025. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.

Top Follow-Up Questions Business Owners Ask

Can I Sell Shares Gradually to a C Corp Without Terminating S Status?

No—even a single non-eligible shareholder (C Corp, partnership, or foreign individual) terminates S status immediately, regardless of ownership percentage.

Can an LLC Buy My S Corp Without Tax Issues?

Depends. If the LLC is taxed as a partnership or disregarded entity, the impact varies, but foreign or C Corp ownership still triggers S termination. Always analyze structure before the sale.

Will the Buyer Inherit My S Corp’s Tax Attributes?

Typically, only in a stock sale (and only if buyer is eligible S Corp owner). Asset purchases reset the tax basis and don’t transmit NOLs or carryovers to the buyer’s entity.

Book a Strategy Session—Get a Deal Structure That Actually Saves Taxes

If you’re even thinking about selling or buying an S Corp, bring KDA in for a review before you sign. Our clients routinely save $30K–$500K in after-tax proceeds simply by fixing their deal structure before the transaction closes. Book your session today to secure the best terms, lowest tax cost, and worry-free compliance in 2025.