I was in a software startup in Texas almost 15 years ago, which underwent a conversion from S to C, for the purpose of seeking external financing. Fortunately, I was not a shareholder at the time.
As I remember (and this is second hand knowledge, so take it as a cautionary tale):
The company's assets (software products and training materials) were assigned a market value by an independent accountant. The market value increased each shareholder's basis in the company, for which they were ultimately liable tax-wise by their percentage ownership in the corporation in the year of conversion to C corporation.
It was very ugly, as the current shareholders' basis went from almost nothing to a significant number, on which they had to pay taxes, but with little options to liquidate their shares to pay the gain in value.
It caused much consternation, gnashing of teeth, and bad feelings among the owners of the corporation--to the point of causing some founders to leave.
I don't know all of the details, or whether the approach they took for the conversion was a good one, but I did learn that you have to be very careful about how this is done. You absolutely must seek competent professional accounting/legal advice. And, you must communicate to the shareholders every detailed step of the process.
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I was in a software startup in Texas almost 15 years ago, which underwent a conversion from S to C, for the purpose of seeking external financing. Fortunately, I was not a shareholder at the time.
As I remember (and this is second hand knowledge, so take it as a cautionary tale):
The company's assets (software products and training materials) were assigned a market value by an independent accountant. The market value increased each shareholder's basis in the company, for which they were ultimately liable tax-wise by their percentage ownership in the corporation in the year of conversion to C corporation.
It was very ugly, as the current shareholders' basis went from almost nothing to a significant number, on which they had to pay taxes, but with little options to liquidate their shares to pay the gain in value.
It caused much consternation, gnashing of teeth, and bad feelings among the owners of the corporation--to the point of causing some founders to leave.
I don't know all of the details, or whether the approach they took for the conversion was a good one, but I did learn that you have to be very careful about how this is done. You absolutely must seek competent professional accounting/legal advice. And, you must communicate to the shareholders every detailed step of the process.