Current valuation theory has evolved such that corporate structure may be a critical factor in valuing a business. Whether you’re buying, selling, gifting or conducting estate planning, tax issues associated with corporate structure should be considered.
Unlike C Corporations which are taxed on income at the corporate level and again at the individual level when dividends are paid to shareholders, S-Corporations are subject to only one-level of taxation. The avoidance of the extra-level of taxation may add additional value to a firm and may be considered when performing a valuation of an S-Corporation. Numerous court cases have addressed the valuation of an S-Corporation. Some cases in which valuators treated S-Corporations the same as a C-Corporation have led to surprised taxpayers, increased tax liabilities and legal fees.
Two things to keep in mind:
- Because S-Corporation shareholders are not taxed on dividends and to some extent avoid capital gains tax, it may be necessary for a valuator to include a premium for these tax savings. Multiple methods exist to account for the S-Corporation premium. This premium adds additional value to the business when compared to a C-Corporation. In some cases, failing to incorporate this in your valuation can result in unplanned taxes resulting from an undervalued business.
- It is critical that the valuator you employ has a firm understanding of this issue to determine whether or not an adjustment is necessary to account for an S-Corporation premium.
Lurie has decades of experience in Twin Cities’ business valuations. Each company is unique, no two valuations are the same and valuation methods are constantly evolving. Please consult us to discuss your specific facts and circumstances.
Farley S. Kaufmann CPA, CVA
Kevin H. Besikof CPA, CVA, CMA, CLP, CFF
Chris G. Van Schooneveld CPA, CVA