Can an S Corp Become a C Corp? The Game-Changer California Business Owners Overlook

Most business owners think once they’ve chosen an S Corporation, their entity status is permanent—change is either impossible or too risky. The reality is, switching from S Corp to C Corp (and vice versa) is not just possible; for some California entrepreneurs, it’s a high-stakes move that can save—or cost—you tens of thousands on taxes. The catch? Miss a single rule, and you could trigger double taxation, unwanted IRS scrutiny, or even blow your future exit plan.

Bottom line: Yes, an S Corp can become a C Corp by revoking its S election with the IRS. But the shift is permanent for at least five years, comes with huge tax and compliance impacts, and demands careful planning and documentation. Ignore the rules, and your five-figure savings could flip into a nightmare liability.

This guide breaks down the smartest— and most dangerous—angles of making the switch for 2025. Whether you’re a founder, a real estate investor, or a high-earning 1099 moving big profits through an S Corp, you’ll walk away knowing when to consider the change, the exact IRS forms to file, and which traps will ruin your ROI if you get it wrong.

This information is current as of 12/3/2025. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.

Quick Answer: How an S Corp Becomes a C Corp in 2025

If your business is taxed as an S Corporation, you can become a C Corporation by formally revoking your S election. File a written statement with the IRS (see IRS Form 2553 instructions). The election cannot be revoked retroactively, and once rescinded, you must wait at least five tax years before re-electing S Corp status. The impacts ripple through your cash flow, payroll, distributions, and future eligibility for entity-based deductions.

• File the revocation by March 15 for a January 1 effective date in California.
• All shareholders with more than 50% of issued stock must consent in writing.
• Transition is not just a formality—it’s a shift in your entire tax posture for years.

S Corp vs. C Corp: IRS Rules and Tax Mechanics

Switching from S to C Corp is not just a change in label. Under S Corp status, eligible profits are passed directly to owners’ personal tax returns—no federal entity-level tax. C Corps pay a flat 21% federal tax rate upfront, but owners are taxed a second time on dividends. The devil is in the details:

• California C Corp Minimum Tax: $800 annual franchise fee applies to both entity types, but C Corps face the added 8.84% state income tax.
• Qualified Business Income (QBI) deduction: S Corps might qualify, while C Corps never do.
• Owner draws/Salary: With an S Corp, reasonable salary is required—profits distributed as K-1 avoid payroll tax. C Corp profits can be trapped—released only as taxed dividends.

Example: Alex owns a California S Corp consulting business, pulling in $250,000. As an S Corp, he pays himself a $100,000 salary (subject to FICA taxes), then takes $100,000 as profit distributions, sidestepping payroll taxes on the latter. If Alex switches to a C Corp, any combined profits are taxed at 21% federal, then again (up to 23.8%) if paid to him as dividends. In 2025, this tax layering can add $20,000+ to his annual bill—unless his long-term plan requires it for outside investment or an IPO.

Why and When to Make the S-to-C Switch

So why would anyone trade S Corp tax simplicity for C Corp complexity? In specific scenarios, it’s the smarter play for higher growth, investor attraction, or taking advantage of long-term capital gains via QSBS (Qualified Small Business Stock):

• Seeking outside investors: Venture capital and institutional funds demand C Corp structure for stock options and equity pools.
• Preparing for exit: C Corp status unlocks IRS Section 1202, exempting up to $10 million in gains from federal tax upon sale if certain requirements are met.
• Growth trajectory: Fast-growing startups expecting big exits may accept double taxation now for a future multi-million-dollar windfall.

Pro Tip: File revocation paperwork well before the acquisition term sheet arrives. Last-minute conversions can derail deals and kill tax-free gains.

KDA Case Study: Tech Entrepreneur’s $96,000 Windfall with a Timed S-to-C Flip

Meet Lisa, a Los Angeles-based SaaS founder. Her S Corp was generating $400,000/year in profits, with Lisa and her co-founder each drawing a $100,000 W-2. While S Corp was optimal during bootstrapping—reducing self-employment tax for two consecutive years—the game changed when a VC offered a $5 million investment, contingent on the business becoming a C Corp.

KDA stepped in, mapping out a transition timeline using the IRS S Corp Revocation rules (see official IRS guidance). We coordinated with the VC’s closing date, switched Lisa’s entity type before issuing new stock, and maximized remaining S Corp distributions to avoid double tax during the transition. Post-conversion, the structure allowed Lisa to use Section 1202 QSBS planning, setting up her first $10 million gains for a potential 100% exemption from federal capital gains tax upon exit.

The result? Lisa’s cost to implement (including new filings, CPA fees, and legal review) was $8,200—but the structuring preserved a $96,000 first-year tax windfall, and positioned her for up to $2.2 million in future sale tax savings. ROI: 11.7x first-year return, with subsequent exit planning nearly tax-free.

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.

The Must-Know IRS Forms, Deadlines, and Compliance Steps

Transitioning from S Corp to C Corp is not just about filing a letter: you must hit every compliance checkpoint or risk serious penalties:

• File formal revocation request (signed by >50% of shareholders) with your IRS Service Center before March 15 for same-year switch.
• Notify the California FTB (Franchise Tax Board) of your entity type change to avoid contradictory year-end state returns.
• Update Articles of Incorporation with the Secretary of State only if ownership, share structure, or bylaws change. In most cases, the entity itself remains—only taxation method differs.
• Prepare dual tax filings for the year of conversion: S Corp through the day before status change (Form 1120-S), C Corp from effective date forward (Form 1120).

Next step: consult the IRS guidance in Publication 542 and California’s resources for corporate entity compliance. Even top-tier legal teams can miss the procedural trap if the entity’s owners initiate or backdate S-to-C transitions without documenting shareholder consent (see IRS details on revoking S elections).

What Most Owners Miss About S Corp Revocation

If you think switching to a C Corp will always save you money, you’re not seeing the full picture. Here’s where almost everyone slips up:

• Built-in gains tax: If your S Corp holds appreciated assets or inventory, a C Corp switch within five years creates a special corporate-level tax when assets are sold or transferred.
• Distribution pitfalls: S to C conversion does not magically eliminate the need to pay out accumulated adjustments (AAA) without double taxation—timing distributions can mean leaving tens of thousands on the table.
• Five-year lockout: Once an S Corp becomes a C Corp, you cannot re-elect S status for five tax years. Get it wrong and you may be stuck, regardless of deal changes or future profitability swings.

Red Flag Alert: Many founders switch status after an investor suggestion, but don’t analyze accumulated profits, leading to an unplanned corporate tax bill on “phantom income.” Work with a pro to model exit scenarios before triggering the change.

Should I Switch My S Corp to a C Corp?

Ask yourself these questions before making the leap:

• Is new investment, sale, or IPO likely within five years?
• Can your business withstand double taxation if profits are distributed versus reinvested?
• Do current and future shareholders support the move?
• Does your growth plan require venture or institutional capital only available to C Corps?

If the answer is “no” to most, sticking with your S Corp often remains optimal—especially once you compare the payroll and flow-through tax savings (up to $18,000/year for solo owners in the $100,000–$250,000 net income range).

How to Model the Tax Impact Before Electing

Before stepping into a C Corp regime, plug your real profit and distribution numbers into a small business tax calculator to simulate the after-tax results under both S and C status for your next three years. Even a minor shift in owner distributions, anticipated capital gains, or state taxes can change the optimal play by thousands annually. Curious how this applies to your business? For a complete breakdown of S Corp strategies, see our comprehensive S Corp tax guide.

FAQ: Common S Corp to C Corp Questions

How long must I stay a C Corp after revoking S status?

You must remain a C Corp for at least five tax years before making a new S election (see IRS instructions).

Can California force me to pay back taxes if I switch?

No, but if your prior S Corp filings were inaccurate or you failed to notify the FTB, penalties may apply.

Will this trigger an audit?

The switch itself doesn’t, but mistakes in transition year reporting can. Clean documentation and a CPA sign-off drastically reduce risk.

IRS Publications and Resources

• IRS Form 2553 Instructions (S Corp election & revocation)
• IRS Publication 542 (Corporations)
• California Form 100 Guide (Franchise tax & corporate filings)

Book Your Corporate Tax Strategy Session

If you’re contemplating an S Corp to C Corp change—or you just want to model how the new rules impact your 2025 tax bill—don’t risk going it alone. Book a custom session with our senior entity strategists, and walk away with a complete, IRS-compliant roadmap. Click here to schedule your tax planning call right now.