C-Corp vs. S-Corp: What is the Difference?

C-Corps and S-Corps are both corporation structures that provide liability protection, but they differ significantly in how they are taxed and who can own them. The "S" and "C" refer to subchapters of the Internal Revenue Code that govern each type.

C Corporation Basics

A C Corporation is the standard corporation structure. It is a separate legal entity that pays its own taxes at the corporate tax rate (currently 21% federal). When the corporation distributes profits to shareholders as dividends, those dividends are taxed again on shareholders' personal returns.

• Double taxation: Profits taxed at corporate level, then dividends taxed to shareholders
• No ownership restrictions: Unlimited shareholders, any type of investor
• Multiple stock classes: Can issue common and preferred shares
• Best for: Businesses seeking venture capital or planning to go public

S Corporation Basics

An S Corporation is a tax election that allows corporate income to pass through to shareholders' personal tax returns, avoiding double taxation. The corporation itself generally pays no federal income tax.

• Pass-through taxation: Income taxed only at shareholder level
• Ownership limits: Maximum 100 shareholders, all must be U.S. citizens or residents
• Single stock class: Cannot have preferred shares (with some exceptions)
• Best for: Small to mid-sized businesses wanting liability protection with simpler taxes

Tax Comparison

The tax difference is significant. Consider a business earning $100,000 in profit:

Financing Implications

Your corporate structure affects financing options:

• C-Corps can raise capital from any investor type, including venture capital firms and foreign investors — important for high-growth businesses
• S-Corps are limited in who can invest, which may restrict certain funding sources
• Both structures provide liability protection that lenders view favorably
• Personal guarantees are typically still required for small business loans regardless of structure

Which Should You Choose?

Most small businesses benefit from S-Corp status due to pass-through taxation. However, if you plan to raise venture capital, go public, or have foreign investors, C-Corp status may be necessary.

Many businesses start as S-Corps and convert to C-Corps later when seeking institutional investment.