Key Takeaways

  • The primary difference in S Corp vs C Corp lies in taxation—C corporations face double taxation, while S corporations pass income through to shareholders.
  • C Corporations can have unlimited shareholders, multiple stock classes, and foreign investors, making them ideal for large or expanding businesses.
  • S Corporations are limited to 100 shareholders and U.S. citizens or residents, offering tax savings for smaller, closely held companies.
  • Both structures provide limited liability protection and require formalities such as bylaws, meetings, and stock issuance.
  • Choosing between the two depends on your growth goals, investor needs, and tax preferences.

The difference between C and S Corp entities is that C-Corps are taxed twice by the IRS as compared to S-Corps, which are only taxed once. S-Corps are, however, are limited in that they can only have US Citizens or permanent resident owners. S-Corps can't have more than 100 owners, and they must have one class of stock or membership.

C Corporations Vs S Corporations 

The S corporation is actually not an entity type, it is just a designation showing a distinct tax treatment system that is available to some corporations and LLCs. Entities that are treated as S corporations are formed the normal way by filing documents with the home state. Therefore, corporations that are treated as S corporation have a similar structure to a C corporation. All new corporations are automatically treated as C corporations by the IRS. 

The two corporation types share the following similarities:

  • For both types, personal income tax is levied on any salary received from the corporation. 
  • Both are obligated to issue stock.
  • Both are required to create bylaws.
  • Both corporations types must hold formal management and shareholders' meetings.

S corporation treatment may be beneficial to businesses in the situations discussed below:

  • Small businesses use this classification to avoid double taxation.
  • Owners of new corporations that anticipate operating at loss in their first few years also benefit from being classified as S corporations. The S-Corp classification enables the owners to write off losses in their personal income statements. This can offset income from other sources and reduce the tax burden.
  • Owners who want to sell the business might get some benefits from selling it as an S-Corp because taxable gains from S corporations are normally less than those of C corporations

Understanding the Legal and Structural Similarities

Both S Corps and C Corps are established under state law as corporations, meaning they share the same foundational legal structure. They must file Articles of Incorporation, adopt bylaws, issue stock, and maintain corporate formalities such as annual meetings and board minutes.

The difference between an S Corp and C Corp is not in how they’re formed, but in how they are taxed under the Internal Revenue Code. Both entities enjoy limited liability protection, keeping owners’ personal assets separate from business debts and obligations.

However, there are practical differences beyond taxation. C Corporations tend to have more complex ownership and investor structures, while S Corporations appeal to small businesses seeking tax efficiency and simpler management.

Key shared characteristics include:

  • Legal recognition as separate entities from their owners.
  • Perpetual existence regardless of shareholder changes.
  • The ability to raise capital by issuing stock.
  • Compliance with both state corporate laws and IRS regulations

How Businesses Become S Corporations

An entity can decide to be taxed as an S corporation by conducting an election and then filing Form 2553 with the IRS. The business can revoke the election at any time. But should the same business desire to be treated as an S-Corp again, it must wait another five years after the revocation.

Eligibility Requirements for S Corporation Status

Not every business qualifies for S Corporation status. To elect S Corp treatment under IRS rules, a company must meet the following requirements:

  • Be a domestic corporation (organized in the United States).
  • Have no more than 100 shareholders.
  • Shareholders must be individuals who are U.S. citizens or permanent residents—partnerships, corporations, and most trusts are excluded.
  • Maintain one class of stock, ensuring all shares have equal rights to distributions and voting.

Once these criteria are met, the business must file IRS Form 2553 signed by all shareholders to elect S Corporation status. If an S Corp violates any of these rules—such as adding a foreign shareholder—it automatically reverts to C Corporation status, losing its pass-through tax treatment.

Differences Between an S Corporation and a C Corporation

Federal Taxation

C corporations are taxed as entities. They file corporate tax returns using Form 1120 and pay taxes at the corporate level. The dividends distributed to the shareholders are also taxed as the personal income of the shareholders. S Corporations, on the other hand, are treated as pass-through entities by the IRS. Though they file tax returns using Form 1120S, they are not taxed by the IRS. The business' profits or losses are passed through to the business owners. It is the owners that pay tax on their earnings to the IRS. Some businesses can, therefore, achieve significant tax savings by filing as S corporations.

State Taxation

Many states mirror the approach of the IRS when taxing S corporations. A few states, however, do not recognize the S corporation concept and tax S corporations the same way as C corporations. Business owners should consult experienced tax lawyers in their states to get reliable info about state taxes.

Ownership 

C corporations have a measure of freedom in the area of ownership arrangements. The number of shareholders is not limited. The law also allows other corporations, partnerships, or trusts to hold stock in a C corporation. S-Corps, on the other hand, are only allowed to have a maximum of 100 owners and these must be individual US citizens or residents. This makes C corporations the wise choice for business owners that intend to expand the business by selling shares.

Rights of Shareholders

S-Corps can only have one class of stock. However, there are no limits to stock categories in C-Corps. The C-Corp ownership structure can be made in a way that there are different groups of shareholders whose rights and votes have different weight. This can be used to reward founders with more voting rights than newer members, making it easy for shareholders to sell shares and expand without the fear of being eclipsed by new shareholders. This is impossible in an entity taxed as an S corporation. 

Fringe Benefits to Owner-Employees

In the C corporation setting, if the corporation extends fringe benefits to at least 70 percent of the company's employees, the cost of those benefits is deductible from the taxes of employee-shareholders. The deductible is not available for most S-Corp employee-shareholders.

Taxation: Double Tax vs. Pass-Through Income

The key distinction in S Corp vs C Corp comparison centers on how income is taxed.

  • C Corporations pay corporate income tax on profits using Form 1120. If profits are distributed to shareholders as dividends, those dividends are taxed again on each shareholder’s personal return—resulting in double taxation.
  • S Corporations, however, avoid this issue through pass-through taxation. The corporation itself does not pay federal income taxes. Instead, profits and losses pass through to shareholders’ personal tax returns via Form 1120S and Schedule K-1, where they’re taxed at individual rates.

While this structure typically reduces total tax liability, S Corp owners must pay themselves a reasonable salary subject to payroll taxes. Remaining profits can be distributed as dividends, which are not subject to self-employment taxes, offering a potential tax advantage.

Ownership, Stock, and Investment Flexibility

When comparing S Corp vs C Corp, ownership flexibility is another major factor:

  • C Corporations can have unlimited shareholders, including foreign investors, corporations, and institutional funds, making them the preferred structure for startups planning to raise venture capital or go public. They can issue multiple classes of stock (e.g., common and preferred shares) to attract different investor types.
  • S Corporations are restricted to one class of stock and a maximum of 100 shareholders, all of whom must be individuals and U.S. residents. These limitations simplify management but limit fundraising options.

For businesses seeking growth or outside investment, the C Corp structure offers greater scalability and flexibility. In contrast, an S Corp works best for smaller, closely held companies that prioritize tax savings and simplicity.

Benefits and Drawbacks of Each Corporation Type

S Corporation Advantages:

  • Avoids double taxation through pass-through income.
  • Owners can write off business losses on personal returns.
  • Can reduce self-employment taxes with proper salary distributions.

S Corporation Disadvantages:

  • Restricted to 100 shareholders and one stock class.
  • Cannot include foreign or corporate shareholders.
  • IRS closely monitors shareholder salaries for compliance.

C Corporation Advantages:

  • Unlimited shareholders, ideal for scaling and raising capital.
  • Multiple stock classes allow flexible investment options.
  • Greater fringe benefit deductions for owner-employees.

C Corporation Disadvantages:

  • Subject to double taxation on income and dividends.
  • More formalities and administrative costs.
  • Losses remain within the corporation and cannot offset personal income.

Choosing Between an S Corp and C Corp

The decision between an S Corp vs C Corp depends on your business goals and growth strategy.

If your company plans to seek investors, issue multiple stock types, or go public, a C Corporation offers the flexibility and structure needed for expansion. However, if your business is smaller, owner-operated, and prioritizes tax efficiency and simplified reporting, an S Corporation may be more advantageous.

You can also start as an S Corporation and later convert to a C Corporation if your funding or expansion needs change. Consulting a business attorney or tax professional can help you determine the best structure for your situation.

If you need help determining whether your business should file as an S Corp or C Corp, you can find a qualified attorney on UpCounsel to guide you through state filing and IRS election requirements.

Frequently Asked Questions

  1. Can an LLC choose to be taxed as an S Corp or C Corp?
    Yes. An LLC can elect to be taxed as either an S Corp or C Corp by filing IRS Form 2553 or Form 8832, respectively. This allows flexibility in managing taxes and payroll.
  2. Can an S Corp have foreign shareholders?
    No. S Corporations can only have U.S. citizens or permanent residents as shareholders. Having a foreign shareholder automatically terminates S Corp status.
  3. How do S Corp shareholders get paid?
    They must receive a reasonable salary for their work, and remaining profits are distributed as dividends, which are not subject to self-employment tax.
  4. Why do large companies prefer C Corps?
    C Corporations allow unlimited shareholders, multiple stock classes, and foreign ownership, making them the preferred choice for attracting investors and going public.
  5. Can a company switch from S Corp to C Corp?
    Yes. A corporation can revoke its S election and become a C Corp, but must typically wait five years before re-electing S Corp status unless the IRS grants an exception.

If you need help with deciding whether your business is better off as s corp vs c corp, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.