The Valuation Battle Between an S Corporation and a C Corporation … Which is Worth More?

By Heather Deskins, CPA/ABV/CFF, CFE, CVA

One of the biggest differences between an S Corporation and a C Corporation is taxes. An S Corporation, along with other pass-through entities (LLCs or partnerships) are not taxed on income at the entity level, but rather at the shareholder level. The taxable income of an S Corporation is passed-through to the shareholders and are taxed at the shareholder level. This is in contrast to C Corporations which are taxed at the corporate level. In addition to the taxable income being taxed at the corporate level, dividends distributed to shareholders of C Corporations are also taxed; however, they are taxed at the shareholder level. The same source of income is taxed twice. Therefore, C Corporations are referred to as “double-tax” entities.

Another tax advantage of an S Corporation is in the shareholder’s tax basis. The shareholder tax basis of an S Corporation is constantly changing based on the entities profits and distributions. A simplified basis calculation is as follows:

calculation example

In general, the value of stock is not affected by the basis itself; however, the shareholder’s return will be affected. The shareholder’s taxable gain on an eventual sale of the stock will be based on the shareholder’s basis.

In the above example, if the business sold for $25,000, a simplified gain on the sale would be $9,000 for an S Corporation shareholder ($25,000 sales price – $16,000 adjusted basis = $9,000 gain) and $15,000 for a C Corporation shareholder ($25,000 sales price – $10,000 initial investment = $15,000 gain).

Due to these tax advantages of S Corporations, some appraisers believe they increase the value of the entity. However, there are other factors to consider in determining whether an S Corporation has added value. Some of these factors include:

  • Standard of value
  • Control or minority interest
  • The amount of distributions, if any
  • Income tax rates

I know attorneys just love the answer “It depends” but, the answer to the initial question “Which is worth more?” must be answered on a case by case basis.

If you have a client that is a C Corporation or an S Corporation and is in need of having their business valued, please feel free to call P.D. Eye Forensics to discuss how we may help.

Heather Deskins, CPA/ABV/CFF, CFE, CVA

Heather Deskins,
CPA/ABV/CFF, CFE, CVA

Managing Member
P.D. Eye Forensics, LLC