Restructuring Into a C Corporation: What Business Owners Should Know

01.07.26

Many businesses start out as LLCs, partnerships or S corporations — all of which are treated as pass-through entities. These structures are flexible and tax friendly in the early years.

But as your company matures, whether by raising outside capital or growing your workforce, switching to a C corporation may make sense.

This article explains what a C corporation is, why restructuring may help, some benefits and drawbacks, and a few of the common ways to do it.

What Is a C Corporation and What Does “Double Taxation” Mean?

A C corporation is a tax classification under federal income tax law (subchapter C of the Internal Revenue Code). Unlike pass-through entities, a C corporation pays tax on its income at the corporate level. If profits are later distributed to shareholders as dividends, those shareholders pay tax again on the same earnings — commonly called “double taxation.”

Because of this two-tiered system, the combined or aggregate tax rate on corporate earnings is generally higher than the overall rate paid by owners of pass through entities.

By contrast, pass-through entities do not pay tax at the entity level. Instead, all income, gain, deductions, and losses “pass through” to the owners, who report them on their personal tax returns and are taxed at their individual income tax rates. This avoids the two-tier corporate tax structure (and its higher aggregate tax burden), but can create complexity when there are many owners, especially foreign investors.

Most C corporations are formed under state corporate law as “traditional” corporations with stock, shareholders, directors and officers. However, other types of entities — like LLCs — can elect to be taxed as C corporations for federal income tax purposes. This flexibility allows businesses to keep their LLC legal form while adopting corporate tax treatment.

Benefits of Restructuring Into a C Corporation

• Familiar Structure and Governance: Corporations operate in a form that investors, employees and advisors already understand, making communication smoother than explaining pass-through concepts like capital accounts or allocations. Further, board, officer and shareholder roles follow well-established norms.
  
• Investor Appeal: Because the corporate model is widely recognized, financing terms and expectations are clearer for venture capital, institutional investors and other sources of "professional money." The corporate form uses well known documents and mechanics, making deals more cost effective to execute and allowing companies to raise capital faster than through pass-through structures. C corporations also have far fewer restrictions on who can be a shareholder than S corporations, allowing foreign investors, tax exempt entities and other types of investors to participate.
• Employee Equity Opportunities: Corporations can offer equity-based compensation — such as stock, options and restricted stock units (RSUs) — that is more traditional, easier to explain, and aligned with employee expectations. This clarity supports recruitment and retention and is far simpler for employees to understand than the equity-based awards used in pass-through entities, such as LLC profits interests.
• Efficient Exit Planning: Pass-throughs may be more efficient for asset sales, while corporations are better positioned for IPOs or stock based mergers, with transferable shares and potential Section 1202 tax benefits.
• Tax Savings Benefits: On the sale of qualified small business stock (QSBS), eligible shareholders may generally exclude gain up to the greater of $15 million or 10 times the shareholder’s adjusted basis in the stock, provided the stock is held for the required three- to five-year holding period and all other requirements under Internal Revenue Code Section 1202 are met.
• Investment Readiness and Flexible Financing: Corporations are well suited to common, widely understood financing tools — such as preferred stock, convertible notes and SAFEs — which fit naturally within the corporate structure and are generally easier to implement than in LLCs. 
• State of Incorporation: Selecting a state whose corporate laws align with the company’s and investors’ objectives — such as governance flexibility, shareholder protections and dispute resolution — can help reduce risk and support long-term strategy.

Potential Drawbacks of C Corporations

• Double Taxation/Loss of Other Pass-Through Benefits: Corporations pay tax on profits at the corporate rate, and shareholders pay a second tax on dividends at their personal tax rates. As a result, the combined effective tax rate on corporate income is generally higher than the single level tax paid through a pass-through entity. Also, owners lose the ability to personally deduct company losses.
• Taxes Upfront: Conversion or restructuring could potentially trigger immediate tax.
• Loss of Management Flexibility: Corporations’ governance and management structures are fairly rigid (e.g., shareholders, directors, officers), unlike LLCs or partnerships, which are fairly flexible.
• Complexity: C Corporations typically involve more paperwork and rules than an LLC.

Common Ways to Restructure Into a C Corporation

• Statutory Conversion: The corporation files a form with applicable state governments to convert the existing entity into a corporation. (Under the Internal Revenue Code, the default tax classification for a corporation is as a C corporation.) This is the simplest method if your state allows it.
• Contribution of Assets or Interests: Owners transfer assets or LLC interests into a new corporation in exchange for stock in that corporation. In practice, some assets or liabilities may be carved out — for example, debt, real estate or non core assets — to make the corporation more attractive to investors.
• Merger or Reorganization: The LLC merges into a new corporation, often structured as a tax-free reorganization to avoid triggering immediate tax.

Conclusion

Restructuring into a C corporation can open doors to investors, make employee equity based compensation easier, and unlock valuable tax benefits. But it also comes with costs and complexities.

If investment or employee compensation is a driver, think ahead about the type of financing and equity awards you expect, and build flexibility into your documents. And when it comes to exits, consider your industry norms: pass-throughs may be more efficient for asset sales, while corporations are better positioned for IPOs and stock based mergers.

Restructuring into a C corporation is not a do it yourself project. With careful planning — and the right legal and tax guidance — restructuring into a corporation can be a smart step toward building long term value and preparing for a successful exit.

Douglas C. Murray is a corporate lawyer with 20 years of experience serving both middle-market and high-growth emerging companies. He provides strategic corporate advisory to business owners, executive teams and investors, focusing on helping clients build and maximize business value. Doug’s practice covers the full corporate lifecycle. He advises emerging companies and venture capital investors, providing guidance on corporate financings while ensuring they have the right entity structure in place to drive innovation and growth. For more established middle-market companies, he provides comprehensive M&A and strategic guidance across various business structures. His counsel is informed by a deep understanding of how different business structures impact everything from daily operations to tax efficiency and overall business value, and he frequently collaborates with financial and tax professionals to help clients achieve optimal outcomes.