S-Corp vs. C-Corp

Quick Definition: S-Corporation vs. C-Corporation

Both S-Corps and C-Corps are corporations formed under state law. The difference comes from how they are taxed and how ownership is set up.

An S-Corporation uses pass-through taxation, meaning profits and losses generally pass through to the shareholders’ personal tax returns. To elect S-Corp taxation, a corporation must meet IRS rules, including a limit of 100 shareholders, all of whom must be U.S. citizens or residents.

A C-Corporation pays taxes at the corporate level. If the corporation distributes dividends, shareholders also report that income on their personal returns. This is sometimes called “double taxation.” C-Corps can have unlimited shareholders, including foreign owners, which can make them appealing for companies planning to raise larger amounts of capital.

PROS

CONS

• Pass-through taxation: Business profits and losses pass through to the owners’ personal tax returns, which can result in higher or lower total taxes depending on the business’s income and the owners’ personal tax situations.
• Limited liability: The corporation is a separate legal entity from its owners and offers personal protection from many business liabilities (your house, car, and savings are usually safe).
• Familiar structure: Many banks and clients recognize the S-Corp setup.
• Supports wage-based benefits: Owners who work in the business receive wages, which can be used for certain retirement plans.

• Pass-through taxation: Because income is reported on owners’ personal returns, this may result in higher or lower taxes depending on the business’s profits and the owners’ personal tax brackets.
• Ownership rules: S-Corps are limited to 100 shareholders, and they must be U.S. citizens or residents.
• One class of stock: S-Corps can issue only one class of stock.
• IRS requirements: Owners who work in the business must receive a reasonable salary.
• Formal procedures: As corporations, S-Corps typically keep bylaws, hold meetings, and maintain minutes.

PROS

CONS

• Corporate taxation: A C-Corp pays taxes at the corporate level. In some cases, this can result in higher or lower total taxes depending on profits, reinvestment, and how dividends are handled.
• Limited liability: The corporation is a separate legal entity from its owners and offers personal protection from many business liabilities.
• Unlimited shareholders: C-Corps can have any number of owners, including foreign shareholders.
• Easier for raising capital: The structure is widely used by investors and venture capital firms.
• Multiple stock classes: C-Corps can issue different types of stock, such as common and preferred.
• Continuity: C-Corps can continue operating even as owners change.

• Corporate taxation: Because the corporation pays taxes on profits and shareholders pay taxes on dividends, the total tax impact may be higher or lower depending on business income and payout strategies.
• More rules and filings: C-Corps follow formal procedures, including annual reports, meetings, and corporate records.
• Higher maintenance costs: Formation and ongoing requirements may cost more than other business types.
• More complexity for smaller operations: The structure may involve more administration than some small companies need.

TOPIC

S-Corp

C-Corp

Structure

A corporation that elects S-Corp tax status. 

A corporation taxed under the default corporate tax rules.

Legal protection

Limited liability protection for owners.

Limited liability protection for owners.

Taxes 

Pass-through taxation.

Corporate taxation plus tax on dividends.

Owners

Up to 100 owners who must be U.S. citizens or residents.

Unlimited owners. No restrictions. Foreign investors and owners are allowed.

Stock

One class of stock only.

Multiple classes of stock allowed.

Key Takeaways

• S-Corps use pass-through taxation and have limits on shareholders and stock classes.
• C-Corps use corporate taxation and allow unlimited shareholders and multiple stock types.
• Both structures offer limited liability protection for owners, so your personal assets (like your house or savings) are usually protected if the business gets sued.