C Corp Vs. S Corp: Which Is Right for Your Business?

Choosing the right legal structure is one of the most important decisions a business owner can make. It affects how your company is taxed, how profits are distributed, and what compliance rules you’ll need to follow. For corporations, the two primary options are C Corporations (C Corps) and S Corporations (S Corps)—and while they share some similarities, they differ in critical ways.

The key distinction between a C Corp and an S Corp lies in how they are taxed. A C Corp is taxed separately from its owners, which can lead to double taxation. An S Corp, on the other hand, allows income to pass through to shareholders, avoiding a corporate tax altogether. Beyond taxes, each structure has its own rules around ownership, profit distribution, and investor flexibility.

In this guide, we’ll break down the differences between C Corps and S Corps, highlight the pros and cons of each, and help you determine which structure might be the better fit for your business goals.

What Is a C Corporation?

A C Corporation (C Corp) is the default legal structure for corporations under U.S. federal tax law. It is a separate legal entity from its owners, which means the business itself is responsible for paying corporate income taxes. Profits are taxed at the corporate level and again when distributed to shareholders as dividends—a concept commonly referred to as double taxation.

Despite the tax implications, C Corps offer several advantages that make them a popular choice for larger companies and those seeking outside investment.

Advantages of a C Corporation

C Corporations offer more flexibility than other business structures, particularly when it comes to growth and raising capital.

• Unlimited shareholders: C Corps can have an unlimited number of shareholders, which is ideal for businesses planning to scale or go public.
  No citizenship requirements: Shareholders can be individuals or entities of any nationality.
• Multiple classes of stock: C Corps can issue different classes of stock, making them more appealing to venture capital and institutional investors.
• Attractive to investors: The structure is well-suited for attracting outside capital due to its flexibility and legal protections.

Disadvantages of a C Corporation

The trade-off for these advantages is more complexity, especially when it comes to taxes and compliance.

• Double taxation: Profits are taxed at both the corporate level and again at the shareholder level when distributed as dividends.
• More regulatory requirements: C Corps must meet strict formalities such as holding annual meetings, maintaining detailed records, and filing separate tax returns.
• Higher administrative costs: Ongoing compliance and legal requirements typically mean higher accounting and legal fees.

What Is an S Corporation?

An S Corporation (S Corp) is a special tax designation that eligible corporations or LLCs can elect by filing IRS Form 2553. Like a C Corp, an S Corp is a separate legal entity, but for tax purposes, it is treated more like a partnership or sole proprietorship. This means the business’s income, deductions, and credits “pass through” to shareholders and are reported on their individual tax returns—effectively avoiding corporate-level taxation.

While the S Corp structure offers important tax benefits, it comes with limitations that can make it less suitable for businesses seeking rapid growth or broad investor access.

Advantages of an S Corporation

S Corps are often chosen by small business owners who want to avoid double taxation while still enjoying some of the liability protection of a corporation.

• Pass-through taxation: Business income is only taxed at the shareholder level, helping to avoid double taxation.
• Potential self-employment tax savings: Shareholders who work in the business can be paid a reasonable salary, with remaining profits potentially exempt from self-employment taxes.
• Limited liability: Like C Corps, S Corps provide protection from personal liability for business debts and obligations.

Disadvantages of an S Corporation

The S Corp structure isn’t for everyone. Its restrictions can limit your flexibility in how you structure and grow your business.

• Shareholder restrictions: S Corps can have no more than 100 shareholders, and all must be U.S. citizens or resident individuals (not partnerships or corporations).
• One class of stock: You can’t issue multiple classes of stock, which can make it harder to attract certain types of investors.
• Eligibility requirements: Not all businesses qualify for S Corp status, and the election must be made within strict IRS deadlines.

Key Differences Between C Corps and S Corps

C Corporations and S Corporations both provide limited liability and follow formal business structures, but they differ significantly in how they are taxed, how they handle ownership, and how flexible they are when it comes to raising capital. Understanding these differences can help you choose the structure that better fits your goals.

Taxation

The biggest difference between these two structures is how the business is taxed. C Corps are taxed as separate entities, while S Corps pass income directly to shareholders.

• C Corp: Subject to double taxation. The corporation pays taxes on profits, and shareholders pay taxes again on dividends received.
• S Corp: Pass-through taxation. Profits and losses flow through to shareholders’ personal tax returns, avoiding corporate-level taxes.

Ownership

Who can own shares in your business—and how many shareholders you can have—depends heavily on which structure you choose.

• C Corp: No limit on the number of shareholders. Shareholders can be individuals, corporations, or foreign investors.
• S Corp: Limited to 100 shareholders, all of whom must be U.S. citizens or residents. No corporate or foreign shareholders allowed.

Stock Structure

Your ability to offer different types of stock can influence how you raise money and structure ownership. This is one area where C Corps have more flexibility.

• C Corp: Can issue multiple classes of stock, which provides flexibility in attracting investors with different rights or preferences.
• S Corp: Limited to one class of stock, which can make it harder to structure equity deals or bring in venture capital.

Investor Appeal

Depending on your growth plans, one structure may appeal more to outside investors than the other. In general, C Corps offer more investor-friendly features.

• C Corp: Generally preferred by institutional investors and venture capitalists due to flexibility in ownership and stock.
• S Corp: Less attractive to outside investors because of shareholder and stock class restrictions.
  

Filing Requirements

Both C Corps and S Corps must file with the IRS, but the forms and tax obligations differ.

• C Corp: Files Form 1120 with the IRS. Subject to corporate tax rates.
• S Corp: Must file Form 2553 to elect S Corp status. Files Form 1120-S annually for informational purposes.

How to Choose Between a C Corp and an S Corp

Deciding between a C Corporation and an S Corporation depends on your business’s goals, growth plans, and how you want to handle taxes and ownership. While both structures offer limited liability and formal legal status, the right choice often comes down to how you plan to operate and scale your business.

Consider Your Growth and Funding Strategy

Your ability to attract outside investors may influence your choice of structure.

• Choose a C Corp if you plan to raise money from venture capital firms or issue multiple classes of stock. C Corps are generally the default for startups seeking institutional investment.
• Choose an S Corp if you’re running a closely held business and don’t expect to take on outside investors beyond a small group of individual stakeholders.

Evaluate Your Tax Preferences

How your business and its owners are taxed can significantly impact your financial outcomes.

• C Corps are subject to double taxation, but this may be acceptable if you plan to reinvest profits into the business rather than distribute them as dividends.
• S Corps allow profits to pass through to shareholders, helping to avoid corporate-level tax and potentially reduce self-employment tax liability.

Think About Ownership Structure

Your current ownership and future plans for transferring or expanding ownership may also shape your decision.

• S Corps have strict requirements: 100 or fewer shareholders, no corporate or foreign owners, and only one class of stock.
• C Corps offer more flexibility, especially if you expect changes in ownership or want to offer equity to employees or investors.

Account for Administrative Requirements

Both entities require formal record keeping and separate tax filings, but C Corps often involve more complexity.

• S Corps may be easier to manage for small businesses due to simpler tax treatment and fewer layers of reporting.
• C Corps may face more regulatory hurdles, but they also offer more long-term structural flexibility.