Stock Sale Escrow: S-Corp vs. C-Corp in California

When a buyer acquires a corporation by purchasing its stock, they are buying the entity itself. This means they inherit everything: the contracts, the employees, the tax history, and the liabilities. The escrow structure must account for these inherited obligations. At Secured Trust Escrow, we structure stock sale escrows for California corporations of all types, with specific attention to the differences between S-corps and C-corps.

S-Corp Stock Sales and Escrow

An S-corporation is a pass-through entity for tax purposes. The income flows to the shareholders’ personal tax returns. When stock is sold, the seller pays capital gains tax on the appreciation. The buyer does not get a step-up in basis for the company’s assets. From an escrow perspective, this means the escrow company must verify that the seller’s personal tax obligations are current, but the company itself does not have a corporate-level tax liability. The escrow holdback for tax purposes is typically smaller in an S-corp sale because there is no double taxation.

C-Corp Stock Sales and Escrow

A C-corporation is taxed at the corporate level. When stock is sold, the seller pays capital gains tax, but the corporation retains its tax history. The buyer inherits any unresolved corporate tax liabilities, including potential audits and assessments. The escrow company must hold back sufficient funds to cover these risks. The holdback period is often longer in a C-corp sale because corporate tax audits can take years. The escrow instructions should specify how long the holdback remains and what triggers release.