Key Takeaways

  • The main difference in S corp vs C corp structures lies in taxation: C corps face double taxation, while S corps are pass-through entities.
  • C corporations allow unlimited shareholders and multiple stock classes, making them ideal for larger, growth-oriented businesses.
  • S corporations are restricted to 100 shareholders, all of whom must be U.S. citizens or residents, and can issue only one class of stock.
  • Both offer limited liability protection, require bylaws, board meetings, and annual reports.
  • C corps are better suited for venture capital and IPOs, while S corps work well for small businesses seeking tax efficiency.
  • S corps must file Form 2553 with the IRS to elect S status, whereas C corps are the default corporation type.
  • Choosing the right structure affects taxes, profits, ownership flexibility, and exit strategy.

What Is the Difference Between an S Corporation vs. C Corporation?

Whether or not to form an S corporation (S corp) vs. C corporation (C corp) is one of the important general choices small business proprietors consider when starting a business or changing their business type. These are the two most common structures, and the selection actually depends upon your business targets.

How the S Corp vs C Corp Decision Affects Your Business

The choice between an S corp and a C corp can significantly influence your company’s taxation, growth potential, and long-term strategy. C corporations are taxed at the corporate level and again when shareholders receive dividends. S corporations avoid this “double taxation” by passing income, losses, deductions, and credits through to shareholders’ individual tax returns.

S corps are often preferred by small business owners who want the benefits of incorporation—such as limited liability and credibility—without the heavy tax burden. C corps, on the other hand, are more flexible for companies seeking to reinvest profits, raise venture capital, or go public. If you plan to attract outside investors or issue multiple stock classes, a C corp provides the necessary structure.

S-Corp v. C-Corp: What Business Structure Is Right For You?

It’s always wise to provide yourself and your small business the liability protection that an LLC or corporation supplies. Spending only a small amount of cash up front and keeping your data updated might be the difference between success and failure. For some companies, an LLC is the perfect structure. LLCs are usually small to medium sized and have determined that they wish to go public and offer shares.

What Is a C Corporation?

A C corporation is a standard enterprise entity for small companies and might be what most individuals think of when they picture a typical enterprise. Technically, a C company is identical to a company and is the default formation of a company. A C corp is the most typical type of company in the USA.

Advantages and Disadvantages of a C Corporation

Advantages:

  • Unlimited number of shareholders.
  • Multiple classes of stock (common and preferred).
  • Easier access to capital and investment opportunities.
  • Ideal for scaling and going public.
  • Corporate income tax rate currently capped at 21% under federal law.

Disadvantages:

  • Subject to double taxation on profits and dividends.
  • More regulatory and administrative requirements.
  • Must maintain detailed corporate records, bylaws, and minutes.
  • Potential for accumulated earnings tax if profits are not distributed.

C corporations are typically the right choice for startups planning to seek institutional investors or issue stock options to employees.

What Is an S Corporation?

An S corp is a slight variation on a C corp. Single-owner LLCs can be taxed as either a sole proprietorship or a company. LLCs with multiple owners can be taxed as either a partnership or a company. Revenue from LLCs treated as sole proprietorships or partnerships is reported instantly on the proprietor’s individual tax returns.

Advantages and Disadvantages of an S Corporation

Advantages:

  • Pass-through taxation prevents double taxation.
  • Shareholders can offset personal income with business losses.
  • Limited liability protects personal assets.
  • Simplified ownership structure encourages small business growth.

Disadvantages:

  • Restricted to 100 shareholders who must be U.S. citizens or residents.
  • Only one class of stock allowed.
  • Not all entities (like partnerships, LLCs, or corporations) can be shareholders.
  • Must maintain compliance with IRS eligibility rules to retain S status.

While S corporations offer favorable tax treatment for small business owners, they may limit long-term scalability or investor appeal compared to C corps.

S Corporation vs. C Corporation: The Similarities

The C corporation is a typical company, whereas an S corporation has chosen a particular tax standing with the IRS. An S company is named because it is defined in Subchapter S of the Internal Revenue Code. To choose S corporation standing when forming a company, Form 2553 should be filed with the IRS, and all S company requirements should be met. S corporations and C corporations both provide limited liability protection, so shareholders (owners) are usually not personally responsible for company debt and liabilities.

Both the S corp and C corp are separate legal entities created by a state filing. All documents should be filed with the state. This paperwork, usually known as the Articles of Incorporation or Certificates of Incorporation, are identical for both C and S corporations. Both S corporations and C corporations have shareholders, directors, and officers. Shareholders are the owners and elect the board of directors, who in turn oversee and direct company affairs and decision-making but aren't responsible for day-to-day operations. The directors elect the officers to handle everyday company affairs.

Both S corporations and C corporations are required to observe the identical internal and external company formalities and obligations, such as the following:

  • Adopting bylaws
  • Issuing stock
  • Holding shareholder and director meetings
  • Submitting annual reports
  • Paying annual fees

S Corporation vs. C Corporation: The Differences

Taxation is commonly considered the most important distinction for small business owners when evaluating S corporations vs. C corporations. C corps are individually taxable entities. C corps file a corporate tax return (Form 1120) and pay taxes at the corporate level. C corps additionally face the potential for double taxation if company earnings are distributed to company owners as dividends, which are considered personal earnings. Taxes on company earnings are paid first at the company level and again on the individual level regarding dividends.

S corps are pass-through tax entities. S corps file an informational federal tax return (Form 1120S), but no income tax is paid on the company level. Any tax due is paid on the individual income tax level by the business owners. S corporations and C corporations are both forms of businesses, and private earnings tax is due both on any wage drawn from the company and from any dividends acquired from the company. C corporations don't have any restrictions on ownership, but S corporations do. S corps are restricted to no more than 100 shareholders, and shareholders should be U.S. residents/citizens.

S corporations can't be owned by the following:

  • C corporations
  • Other S corporations
  • LLCs
  • Partnerships
  • Many trusts

S corporations can have just one class of stocks (disregarding voting rights), whereas C corporations can have a number of classes. Because of this fact, C corporations offer a little more flexibility when starting a business for those who plan to develop, increase possession, or promote their company.

How to Choose Between an S Corp and a C Corp

When deciding between S corp vs C corp status, consider the following:

  • Business size and growth goals: S corps work best for small, closely held companies. C corps suit large enterprises or those seeking outside investors.
  • Tax objectives: If minimizing self-employment taxes is a priority, S corp status may be advantageous. For reinvestment and stock options, C corp status is better.
  • Ownership flexibility: If you plan to bring in foreign investors, you must form a C corp, as S corps restrict ownership to U.S. citizens and residents.
  • Exit strategy: C corporations facilitate mergers, acquisitions, and public offerings.

Before making the election, file Form 2553 with the IRS for S corp status and ensure you meet all eligibility requirements. Otherwise, your business remains a C corporation by default.

Tax Planning and Payroll Considerations

S corporation shareholders who work for the company must pay themselves a reasonable salary, which is subject to payroll taxes, while additional profits can be distributed as dividends not subject to self-employment tax. This hybrid approach can result in tax savings if managed properly.

C corporations, conversely, have more flexibility in retaining earnings to reinvest in the business but face taxation on both corporate income and dividends. However, C corps can deduct a wider range of business expenses, including certain fringe benefits like health insurance and retirement contributions, which are not always deductible for S corp shareholders.

Business owners often consult tax professionals to determine whether their growth strategy aligns better with the flat corporate rate of a C corp or the pass-through structure of an S corp.

Frequently Asked Questions

  1. Can a C corporation convert to an S corporation?
    Yes. A C corp can elect S status by filing IRS Form 2553, provided it meets eligibility criteria for ownership and stock structure.
  2. Can an S corporation have foreign shareholders?
    No. All S corp shareholders must be U.S. citizens or resident individuals. Foreign investors can only hold shares in C corporations.
  3. Which is better for startups—S corp or C corp?
    C corps are typically preferred by startups seeking venture capital or preparing for an IPO, while S corps suit smaller, owner-managed businesses.
  4. What are the main tax filing differences?
    C corps file Form 1120 and pay corporate taxes; S corps file Form 1120S, and shareholders report income on personal returns.
  5. How do dividends work for S and C corps?
    C corp dividends are taxed twice—corporate and individual levels. S corp distributions are taxed once through shareholder returns.

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