S Corp vs. C Corp: Key Differences and How to Choose the Best Structure

Deciding to incorporate your small business is a significant step, but it's not the only decision you'll need to make. You'll also have to decide which of the following business structures to select for your evolving operations: 

• S corporation 

• C corporation

Is forming as an S corporation or C corporation the optimal structure for your business? Each type of corporation has unique benefits, and the S corp vs. C corp decision you'll make will have complex tax implications. We’ll help you understand the characteristics of each structure so you can make a confident selection.  

This article will compare the S corp vs. C corp business structures. You’ll learn the key differences, similarities, and implications of choosing the best entity type for your thriving business.

Understanding Corporate Structures

Before grasping the similarities and distinct differences between S corps and C corps, you should understand the basics of the corporate structure. 

A corporation is a legal entity separate from its business owners, also known as shareholders. Corporations are, by default, considered C corporations. Filing Internal Revenue Service (IRS) Form 2553, Election by a Small Business Corporation, is the process of S corporation election.

What is a significant benefit of the corporate structure? Corporations offer limited liability protection, which means shareholders cannot be held responsible for corporate debts or liabilities. Business owners gain personal asset protection from corporate claims, among other business tax benefits. 

To form a corporation, the business owner must file Articles of Incorporation with the Secretary of State. Incorporation documents establish:

• A registered agent

• Adoption of bylaws

• Selection of the board of directors

After incorporation, do the following to maintain compliance: 

• Hold annual board meetings 

• File annual reports

• File quarterly and annual tax returns

What is an S corp?

The S corporation structure adheres to the Internal Revenue Code's Subchapter S rules. After incorporation, entrepreneurs can file Form 2553 (we’ll explain more about the election later) to elect S corp status.

S corporations are pass-through entities for income tax purposes, which means S corps do not pay corporate income tax on their earnings. S corps must distribute income and deductions to their shareholders annually. Each shareholder receives a prorated distribution determined by their ownership percentage. Shareholders pay tax on their share of business income and can claim deductions to reduce their taxable income. 

Business owners find the S corp business structure attractive because pass-through taxation avoids the double taxation that C corps are subject to. This can be a significant tax advantage, leading to significant personal income tax savings and a reduced tax liability when they file their personal tax returns.  

S Corp disadvantages (and requirements)

S corps must follow specific eligibility rules or risk having their S corporation election terminated. S corp eligibility requirements include the following: 

• S corps cannot have more than 100 shareholders or more than one class of stock.

• Shareholders are U.S. citizens and cannot be corporations, partnerships, or nonresident aliens. 

• S corps must generate less than 25% of its gross receipts from passive investment income. 

• S corporations must maintain records of each shareholder’s basis in the corporation. 

These requirements can impact or limit how you conduct business. For example, if you intend to seek international investment or desire more complex stock types, you cannot operate as an S corporation.

Complex S corp rules and considerations can be complicated without experts on your side. We recommend consulting with accounting professionals who specialize in entity formations.

What is a C corp?

C corporations follow Subchapter C of the Internal Revenue Code, with all newly incorporated businesses defaulting to the C corp structure. 

C corporations can raise capital by adding an unlimited number of shareholders, who contribute cash in exchange for ownership in the business. Shareholders can include:

• Individuals

• Partnerships

• Corporations

• Other entities

Unlike S corps, C corps can issue multiple classes of stock. 

C corps aren’t required to distribute earnings to shareholders, so C corp business owners aren’t guaranteed annual dividends. Instead, C corps may choose to reinvest earnings and fund business growth.

C Corp disadvantage(s)

The major downside to the C corp structure is double taxation. Double taxation means the C corporation and its shareholders pay tax on the business’s income. 

• First, the C corp pays tax on its net income. 

• Second, the C corp’s shareholders pay tax on corporate dividends on an individual level. 

Regardless, many small business owners find that the benefits of the C corp’s flexibility outweigh the additional tax burden of double taxation.

Need help determining whether the C corp business structure is right for your business? Our entity formation professionals are here to support you.

S Corp vs. C Corp: The Similarities

While S corps and C corps have differences that make them distinct, they also share similarities. The top similarities between S corps and C corps include: 

• Limited liability protection 

• Both are incorporated entities with a formal business structure 

• Perpetual existence 

• Owned by shareholders 

• Both must hold annual meetings and comply with requirements that other entities, including limited liability companies (LLCs) and sole proprietorships, typically avoid.

S Corp vs. C Corp: The Key Differences

As we’ve covered, S corporations and C corporations share many characteristics. The following table summarizes the key differences between S corp and C corp structures.

Tax Implications of Choosing S Corp vs. C Corp

Let’s consider a simplified example that illustrates the tax impacts of an S corporation versus a C corporation. 

Compare two corporations: QRS Company is an S corp, and ABC Company is a C corp. The companies share the following facts: 

• Each corporation has two owners, and each owner holds a 50% ownership stake.

• During 2025, the corporations each earned $1,000,000 and reported taxable income of $500,000.

• Each shareholder was subject to a combined federal and state income tax rate of 40% on corporate distributions.

S corp tax implications example

QRS Company met all S corp requirements and did not pay federal or state income tax. 

QRS Company distributed all profits to its shareholders, so each owner received $250,000. Each S corp owner paid taxes of $100,000 on their distributions.

The shareholders each kept $150,000 after taxes.

C corp tax implications example

ABC Company paid $105,000 of federal income tax at a 21% corporate tax rate. Assuming a 7% state income tax rate, ABC Company paid $35,000 of state income tax. 

The company distributed its after-tax income of $360,000 as dividends, resulting in each shareholder receiving $180,000. Each owner paid $72,000 in taxes on dividends. 

The shareholders each kept $60,000 after taxes.

S corp vs. C corp: Summary of tax implications

The following tables compare the above example’s S corp vs. C corp tax implications.

As you can see, the S corp and its shareholders enjoyed a lower total tax bill because S corps aren’t subject to double taxation. Further, the S corp shareholders kept more after-tax income than the C corp shareholders. 

The above example illustrates potential tax implications using a simplified fact pattern, but your decision between an S corporation and a C corporation should also consider non-tax factors. 

If you’re interested in S corporation status for your company, we recommend consulting with tax professionals who can help you consider the economic and administrative implications.

C Corp vs. S Corp: Which Is Better?

When is a C corp better than an S corp?

It's more advantageous to operate as a C corp than an S corp when: 

• Seeking outside investors 

• Planning an IPO

• Retaining earnings for reinvestment 

• Offering employee stock options 

• Courting international shareholders 

• Accessing specific tax deductions and benefits

When is an S corp better than a C corp?

It's more advantageous to operate as an S corp than a C corp when: 

• Avoiding double taxation

• Limiting shareholders and simplifying the class of stock

• Your strategy omits seeking significant outside capital or going public 

• You prefer simpler governance and tax reporting responsibilities 

How to Change from C Corp to S Corp (Or Vice Versa)

Filing an S Corp Election

C corp status is the default for new corporations. You can make an S corp election by filing IRS Form 2553, Election by a Small Business Corporation, by March 15 if your business follows the calendar year.

Before filing, confirm that your business meets the S corporation requirements and prepare to provide information about each shareholder. Review the S corporation eligibility criteria and consult your tax professional if needed. 

After you receive IRS approval, you may need to notify state and local taxing agencies of your S corp status. We can help you determine which notifications and disclosures you should file.

Terminating an S Corp Election

If you wish to end your S corp status and revert to a C corp, you can file a statement of revocation with the IRS by March 15.

The statement should include:

• Your company’s information

• Shareholder details

• Shareholder signatures 

Be sure to review the complete requirements and due dates before filing.

Partner with Experts Who Understand What’s Best for Your Specific Situation

This guide helps answer the challenging question: How do you determine whether an S corporation or a C corporation structure is best for your business? 

Ultimately, your decision requires weighing the benefits and drawbacks of each business entity type. 

Consider your business plan for raising capital and your shareholders’ tolerance for double taxation at the corporate level. Consider the requirements of each corporate structure – do you have the necessary resources to maintain compliance?

Partner with 1-800Accountant, America's leading virtual accounting firm, to aid in your business structure decision while ensuring year-round compliance. Our tax professionals can:

• Help you understand the complex implications for your business

• Support your entity formation 

• Guide you throughout the year with professional tax planning and advisory

Ready to incorporate? Schedule your free 30-minute consultation with one of 1‑800Accountant's business experts today to get started.