What is the difference between C-corp and S-corp and why pick one or another?

Jul 14, 2023


When starting a business, one of the most important decisions you will make is choosing the right legal structure. Two of the most common types of business structures are C-corporations (C-corps) and S-corporations (S-corps). Both have their advantages and disadvantages, and it is essential to understand the differences between them to make an informed decision.

What is a C-corp?

A C-corp is a separate legal entity from its owners. It is taxed as a separate entity, and the profits are subject to corporate income tax. C-corps are owned by shareholders, and the management is handled by a board of directors. C-corps can have an unlimited number of shareholders, and the ownership can be transferred easily.

corporation tax

What is an S-corp?

An S-corp is also a separate legal entity from its owners. However, it is not taxed as a separate entity. Instead, the profits and losses are passed through to the shareholders and reported on their individual tax returns. S-corps are limited to 100 shareholders, and the shareholders must be US citizens or residents.

s corporation

Tax Treatment:

  1. C-Corporation: C-corps are separate legal entities and file their own tax returns. They are subject to corporate income tax at the federal and state levels. C-corp profits are taxed twice: once at the corporate level and again when distributed to shareholders as dividends. This is known as double taxation.

  2. S-Corporation: S-corps, on the other hand, are pass-through entities, meaning they avoid double taxation. Instead, the profits and losses "pass through" to shareholders' personal tax returns, and the business itself does not pay federal income tax. Shareholders report their share of the S-corp's income and losses on their individual tax returns.

Ownership and Shareholders:

  1. C-Corporation: C-corps can have an unlimited number of shareholders, and they can include individuals, other corporations, and foreign entities. C-corps have no restrictions on the type of shareholders or their residency status.

  2. S-Corporation: S-corps have specific eligibility requirements. They must be domestic entities, have no more than 100 shareholders, and only allow certain types of shareholders, such as individuals, estates, and certain trusts. Additionally, S-corps cannot have non-U.S. resident alien shareholders.

Flexibility and Formalities:

  1. C-Corporation: C-corps typically offer more flexibility in terms of ownership structure, stock classes, and potential growth. They can issue different classes of stock, making it easier to attract investors and raise capital. C-corps have more formalities, including regular board meetings, annual shareholder meetings, and detailed record-keeping.

  2. S-Corporation: S-corps have more restrictions on ownership and are generally suitable for smaller, closely held businesses. They are limited to one class of stock, which simplifies the ownership structure. S-corps have fewer formalities, such as annual meetings and record-keeping, compared to C-corps.

Other Considerations:

  1. Tax Planning: C-corps may be advantageous for businesses that plan to reinvest profits into growth or have substantial income that can be retained within the company. S-corps are often chosen by businesses with lower profits and where the owners want to benefit from pass-through taxation.

  2. Employee Benefits: Both C-corps and S-corps can provide employee benefits such as health insurance, retirement plans, and fringe benefits. However, S-corp shareholders who actively participate in the business may need to pay themselves a reasonable salary, subject to payroll taxes.

  3. Exit Strategy: If you plan to sell your business or go public in the future, C-corps might be more suitable. They offer flexibility in terms of ownership transfer and attracting potential investors.

Advantages of a C-corp

Limited Liability

One of the biggest advantages of a C-corp is that the owners have limited liability. This means that the personal assets of the shareholders are protected from the debts and liabilities of the corporation.

limited liability

Unlimited Shareholders

C-corps can have an unlimited number of shareholders, making it easier to raise capital. It also allows for the ownership to be transferred easily, providing more flexibility for the business.

raising capital

Advantages of an S-corp

Tax Benefits

The biggest advantage of an S-corp is the tax benefits. The profits and losses are passed through to the shareholders and reported on their individual tax returns. This means that the corporation does not pay federal income tax, and the shareholders avoid double taxation.

tax benefits

Pass-Through Taxation

S-corps also have pass-through taxation, which means that the corporation's profits and losses are not subject to self-employment tax. This can result in significant tax savings for the shareholders.

self employment tax

Which one to choose?

Choosing between a C-corp and an S-corp depends on several factors, including the number of shareholders, the tax situation, and the business's long-term goals. If the business plans to go public or raise capital through investors, a C-corp may be the better option. If the business has a small number of shareholders and wants to avoid double taxation, an S-corp may be the better choice.

choosing between c corp and s corp


Choosing between a C-corp and an S-corp is an important decision that can have significant consequences for your business. It is essential to weigh the advantages and disadvantages of each structure and consult with a legal and tax professional before making a decision.

 Factors such as tax implications, ownership structure, growth plans, and compliance requirements will play a significant role in making an informed decision.