The Difference Between an “S” Corporation vs. “C” Corporation

What is a C Corporation?

A C corporation is the default corporate structure under federal tax law. It is treated as a separate legal and tax-paying entity. C corporations are generally subject to double taxation, meaning their income is taxed at the entity level when earned and again at the shareholder level when distributed as dividends.

Key features of a C corporation include:

• Unlimited number of shareholders
• No restrictions on shareholder citizenship or residency (non-residents may be shareholders in a C corporation)
• Ability to issue multiple classes of stock
• Preferred structure for venture capital and institutional investment

What is an S Corporation?

An S corporation is a corporation that elects pass-through taxation under Subchapter S of the Internal Revenue Code, meaning it generally does not pay federal income tax at the entity level. Instead, its profits and losses pass through to shareholders, who report their respective shares on their individual income tax returns, regardless of whether the income is distributed. Because income is taxed only at the shareholder level, S corporations can offer meaningful tax savings for closely held businesses. S corporations are commonly used by small to mid-sized businesses seeking tax efficiency without complex ownership structures.

Key features of an S corporation include:

1. Pass-through taxation (profits and losses flow to shareholders’ personal tax returns)
2. Generally, not subject to federal corporate-level income tax
3. Limited to 100 shareholders
4. Shareholders must be U.S. citizens or residents (partnerships and corporations cannot be shareholders)
5. Only one class of stock is permitted

Which Structure Should You Choose?

An S corporation may be appropriate if:

1. The business is closely held
2. Owners want pass-through taxation
3. No foreign investors are anticipated

A C corporation may be the better choice if:

1. The business plans to raise venture capital
2. Multiple classes of stock are needed
3. Long-term growth and reinvestment are priorities
4. Foreign investors are anticipated

The right choice depends on tax planning, ownership goals, and future growth strategy. Selecting between an S corporation and a C corporation has long-term tax, legal and other consequences. A structure that works today may limit opportunities tomorrow if not chosen carefully. Consultation with experienced corporate counsel and tax advisors are needed to ensure that the business entity’s foundation is properly established from the outset of your corporate venture.

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