Key Takeaways

  • Tax treatment differs significantly: S Corps and partnerships use pass-through taxation, while C Corps face double taxation at the corporate and shareholder levels.
  • Ownership flexibility varies: S Corps are limited to 100 U.S. shareholders, while C Corps can have unlimited domestic or foreign shareholders and issue multiple stock classes.
  • Partnerships offer simplicity and flexibility: They have fewer formalities than corporations and allow customized profit-sharing arrangements.
  • C Corps are ideal for growth and investment: They can attract venture capital and issue preferred stock, but at the cost of higher administrative complexity.
  • S Corps combine limited liability with tax advantages: They suit small-to-medium businesses seeking liability protection without corporate double taxation.
  • Choosing the right entity impacts funding, taxes, and compliance obligations.
  • Business owners should consult a tax professional or attorney—such as those available on UpCounsel—to determine which structure aligns with their goals.

When comparing C corporation vs S corporation vs partnership business entity structures, note that these entities have both similarities and differences on many different fronts. It's important to know the differences between the entity types available, especially when forming a company. 

The most notable differences between S corporations (S-Corps), partnerships, and C corporations (C-Corps) have to do with taxation and ownership restrictions. When you're starting a business, it's good to understand these differences to be sure you choose the right business structure to help you meet your business goals. 

Taxation Differences Among S-Corps, C-Corps, and Partnerships

S-Corps and partnerships are taxed as disregarded entities, meaning they're not viewed as their own separate entity from their owners or shareholders. Therefore, they are not subject to company taxes. 

The income for S-Corps and partnerships passes through to the owners and is only taxed once on the owner's personal income tax returns. S-Corps are still required to file a 1120S form to report the company income, but they are not taxed on it.

C-Corps are viewed as legally separate entities. Therefore, they are taxed on their company income by filing a Form 1120. This leads to double-taxation, as the income is taxed both at the company level and again when the shareholders claim their dividends on their personal income tax returns.

Any salary or dividends collected from the business by the owners or the shareholders must be taxed as personal income, whether the business is a C corporation, a partnership, or an S corporation.

How Self-Employment and Dividend Taxes Differ

While S Corps and partnerships both avoid corporate income tax through pass-through taxation, their handling of self-employment tax differs. In a partnership, all partners typically pay self-employment tax on their share of the income. However, in an S Corp, only the shareholder-employee’s reasonable salary is subject to payroll taxes. Distributions beyond that salary are not subject to self-employment tax, which can significantly reduce overall tax liability.

C Corporations, on the other hand, must pay corporate income tax on profits before distributing dividends, and shareholders pay tax again on those dividends. Although recent corporate tax reforms capped the federal corporate rate at 21%, double taxation remains a key consideration for small business owners evaluating s corp vs c corp structures.

Ownership Differences

S corporations have quite a few limitations when it comes to ownership and shareholders. For example:

  • An S-Corp cannot have more than 100 shareholders at one time.
  • All shareholders must be citizens and residents of the United States.
  • Other business entities cannot own shares in an S-Corp.

C corporations are not limited to how many shareholders they can have. Individuals and business entities can own shares in a C-Corp, the owners don't need to be U.S. citizens, and they can even be foreign companies.

Investor Appeal and Fundraising Potential

C Corporations are the preferred entity for attracting outside investors and venture capital. They can issue multiple classes of stock, including preferred shares with special rights, which is essential for institutional funding and IPO preparation. Foreign investors and other business entities can also own stock in a C Corp, which broadens investment opportunities.

By contrast, S Corporations face strict ownership restrictions—only U.S. citizens or residents may be shareholders, and ownership is capped at 100 individuals. These limitations often make S Corps unsuitable for startups seeking equity financing or large-scale growth.

Partnerships can be flexible in ownership and profit-sharing arrangements, but their less formal structure can deter professional investors who prefer the predictability and governance of a corporate framework.

Stock Differences

C-Corps can offer different types or classes of stock to investors. The two main types are:

  • Common stock
  • Preferred stock

The classes determine levels of influence in the company. This option for different levels of stock makes C corporations a great option for businesses looking for growth and a wide range of investors. 

S corporations can only offer one level of stock to investors, so all have the same rights and level of influence.

Dividends, Distributions, and Profit Allocation

C Corporations distribute profits as dividends, which are not deductible for the company and are taxed again at the shareholder level. In contrast, S Corporations distribute profits based on share ownership percentage, and these distributions are generally not subject to self-employment taxes.

Partnerships allow for customized profit allocation that doesn’t need to align strictly with ownership percentages. Partners can agree to share profits and losses in any proportion outlined in the partnership agreement, making this structure ideal for flexible business relationships.

Partnerships

Business owners can enjoy quite a bit of flexibility if they choose to form a partnership. However, they must have two or more members, also known as owners. Partnerships also enjoy specific tax benefits not available to C corporations or S corporations.

Pros and Cons of Partnership Structures

Advantages:

  • Simple to form and operate with fewer formalities.
  • Pass-through taxation eliminates corporate-level tax.
  • Flexible ownership and management structure.
  • Ability to allocate profits and losses disproportionately to ownership stakes.

Disadvantages:

  • Partners are personally liable for business debts unless structured as a limited partnership or LLP.
  • Raising capital can be difficult compared to corporations.
  • Disagreements between partners can lead to operational challenges or dissolution.

For businesses prioritizing flexibility and simplicity over formal compliance and investor access, partnerships may be the right choice. However, for scaling operations or seeking outside funding, S Corps and C Corps offer greater long-term advantages.

Similarities Between S-Corps and C-Corps

C corporations are usually the type of entity people think of when they hear the word "corporation." S corporations are tax designations that can be elected by LLCs and other entity types. In order for a company to elect S-Corp status, they need to fill out Form 2553. 

Both corporation types get their names from their definitions under the IRC (Internal Revenue Code):

  • C corporations are taxed under the subchapter C of the IRC.
  • S corporations are taxed under the subchapter S of the IRC. 

S-Corps and C-Corps both offer liability protection for their shareholders. If the company goes into debt or defaults on a loan, the shareholders' personal assets are not at risk. 

Business owners can create an S-Corp or a C-Corp by filing Articles of Incorporation with the state, and then electing the desired entity type with the IRS.

Articles of Incorporation are also called:

  • Formation Documents
  • Certificate of Incorporation
  • Articles of Organization

Both S-Corps and C-Corps are required to have the corporate structure with an elected board of:

  • Directors
  • Shareholders
  • Officers

The board of directors is a group of shareholders that:

  • Manage the big company decisions
  • Enforce the bylaws

Officers are elected by the directors to handle the regular business operations. 

There are a few requirements for both S-Corps and C-Corps, including:

  • Bylaws
  • Directions and officers
  • Regular meetings of shareholders and directors
  • Annual report filings
  • Annual fees

Compliance Requirements and Corporate Formalities

Both S and C Corporations must comply with strict state and federal requirements, including filing annual reports, maintaining bylaws, and holding shareholder meetings. They also require a registered agent and must maintain accurate records of minutes and shareholder decisions.

Both entity types offer limited liability protection, shielding owners’ personal assets from business debts and lawsuits. However, C Corporations face heavier regulatory burdens and reporting standards, particularly for large or publicly traded companies.

S Corporations must also maintain compliance with their ownership restrictions and ensure they issue only one class of stock, as violating these rules can revoke their S status.

Choosing Between an S Corp, C Corp, or Partnership

When evaluating s corp vs c corp vs partnership, the right choice depends on factors such as:

  • Business goals (growth vs. simplicity)
  • Tax strategy (avoidance of double taxation vs. reinvestment flexibility)
  • Ownership structure (number and type of shareholders)
  • Funding needs (venture capital vs. personal financing)

An S Corporation is often ideal for small businesses seeking tax savings with limited liability protection. A C Corporation suits companies aiming to scale, reinvest profits, or attract institutional investors. A Partnership remains a strong choice for small teams prioritizing operational flexibility over formal structure.

To ensure your choice aligns with your business’s long-term financial and legal goals, you can find an experienced business attorney on UpCounsel to guide your entity selection, tax election, and compliance strategy.

Frequently Asked Questions

  1. Can a C Corp convert to an S Corp later?
    Yes. A C Corporation can elect S Corporation status by filing IRS Form 2553, provided it meets S Corp eligibility requirements, such as the shareholder limit and citizenship rules.
  2. Which entity pays less in taxes overall?
    It depends on income, deductions, and distributions. S Corps often reduce overall tax burden through pass-through taxation, while C Corps benefit from lower corporate rates and greater reinvestment flexibility.
  3. Are partnerships riskier than corporations?
    General partners are personally liable for debts and lawsuits, unlike shareholders in S or C Corps who enjoy limited liability. Limited partnerships (LPs) and LLPs can reduce this exposure.
  4. Why do startups prefer C Corporations?
    C Corps allow unlimited shareholders, multiple stock classes, and foreign ownership—all critical for raising venture capital and going public.
  5. Can an LLC elect to be taxed as an S Corp or C Corp?
    Yes. An LLC can elect S Corp or C Corp taxation by filing IRS Form 2553 or 8832, respectively, allowing flexible control over how profits are taxed and distributed.

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