C Corp vs S Corp
Which Corporate Structure Saves You More?
C Corps face double taxation but offer unlimited growth. S Corps pass income through to avoid it. The right choice depends on your income level and plans.
Side-by-Side Comparison
| Feature | C Corporation | S Corporation |
|---|---|---|
| Taxation | Double (corporate + dividend) | Pass-through (personal only) |
| Corporate Tax Rate | 21% flat | N/A (no entity-level tax) |
| Shareholders Max | Unlimited | 100 |
| Shareholder Types | Anyone (including foreign, entities) | US individuals, certain trusts only |
| Stock Classes | Multiple classes allowed | One class only |
| Self-Employment Tax | No (employees pay FICA on wages only) | No SE tax on distributions above reasonable salary |
| Raising Capital | Easier (investors prefer C Corps) | Limited (ownership restrictions) |
| QSBS Eligibility | Yes (up to $10M exclusion) | No |
Tax Comparison Calculator
Compare your estimated total tax burden under each corporate structure.
Simplified estimate for illustration. Consult a CPA for your specific situation.
The S Corp Self-Employment Tax Advantage
The primary reason most small businesses choose S Corp status is to save on self-employment tax (15.3%).
Example: $200,000 Net Income
IRS scrutiny: The "reasonable salary" must reflect what someone in your role would earn. Setting it too low to maximise distributions invites audit risk.
When C Corp Makes Sense
Raising Venture Capital
VCs strongly prefer C Corps. Most term sheets require C Corp structure.
Retaining Earnings
21% corporate rate is lower than personal rates above ~$90k. Good for reinvesting profits.
QSBS Tax Exclusion
Exclude up to $10M or 10x basis in capital gains on stock held 5+ years.
Multiple Stock Classes
Need preferred and common shares for investors? Only C Corps allow multiple classes.
Foreign Shareholders
International investors or parent companies cannot hold S Corp stock.
Planning an IPO
Public companies are C Corps. Starting as one avoids conversion complications.
S Corp Eligibility Requirements
- -Maximum 100 shareholders
- -US citizens or permanent residents only
- -One class of stock (no preferred shares)
- -Cannot be a bank, insurance company, or DISC
- -All shareholders must consent to the S election
- -Must file Form 2553 with the IRS
Decision Framework
Revenue under $50k?
LLC or sole proprietorship may be simpler. S Corp overhead may not be worth it yet.
Taking outside investors?
C Corp. VCs and angel investors expect it.
Net income above reasonable salary by $30k+?
S Corp saves significantly on self-employment tax.
Planning to keep profits in the business?
C Corp's 21% rate may be lower than your personal rate.
Want maximum flexibility for the future?
C Corp. No ownership restrictions, multiple stock classes available.
Want the simplest pass-through structure?
S Corp. One level of taxation, SE tax savings on distributions.
Converting Between Structures
LLC to S Corp
Most common conversion. File Form 2553 with the IRS. Relatively straightforward.
C Corp to S Corp
Possible but triggers built-in gains tax on appreciated assets. 5-year recognition period.
S Corp to C Corp
Relatively straightforward. Often needed before raising venture capital.
State Tax Considerations
Some states impose additional taxes on S Corps that can change the analysis. California, for example, charges an $800 minimum franchise tax plus 1.5% tax on net income for S Corps. New York City taxes S Corps at the entity level. Always factor in your state's specific rules when comparing structures.