our analysis also implies that shares of S corporations are likely to be less
liquid than shares of C corporations. When making an S election, the firm is
limited to 75 shareholders, none of which can be institutional investors. By
virtue of these constraints, S shares are less liquid than C shares. Therefore,
one would expect that when valuing an S corporation, the estimated liquid-
ity discount would necessarily be larger than for an equivalent C corpora-
tion. While there is no research that might provide guidance regarding what
the size of the incremental discount might be, based on the analysis pre-
sented here, it does not appear likely that the increment would exceed 5 per-
cent. Thus, if the sale of a 100 percent stake in a private C firm commands
a discount of 20 percent, the liquidity discount for an equivalent S corpora-
tion would likely be in the neighborhood of 25 percent.
104 PRINCIPLES OF PRIVATE FIRM VALUATION