When choosing a business structure, entrepreneurs have options. Some will go with a Limited Liability Company (LLC), while others may want to form an S corporation or C corporation.
Here we’ll compare the advantages and disadvantages of S corps and C corps. While they only have one letter difference in their names, there are important distinctions between the two.
What is a C Corp vs an S Corp?
Before we dive into differences, let’s talk about the similarities of the two.
When you form a corporation at the state level, you file Articles of Incorporation (or in some states, a Certificate of Incorporation) with the Secretary of State or other agency responsible for corporate registration. The state doesn’t care whether you plan to operate as a C corp or S Corp; it simply recognizes a business as a corporation.
Corporations are separate legal entities that offer liability protection. Generally, the owners won’t be personally responsible for debts the business incurs.
Both the C corp and S corp must follow certain corporate formalities, such as issuing stock, adopting bylaws, appointing a registered agent and holding shareholder meetings.
Most states require corporations to file an annual report or statement of information (some require biennial reports) and may require the corporation to pay an annual (or biennial) filing fee.
Again, all of these basic requirements are the same regardless of whether you elect S corporation status or stick with a C corporation, which is the default.
S Corp vs C Corp Differences
So what’s the difference between the two? Basically there are two main differentiators between S corporations and C corporations: taxation, and ownership.
First, let’s reiterate that the S corporation is a choice that’s made for tax purposes. A corporation can elect to be taxed under Subchapter S of the Internal Revenue Code by filing IRS Form 2553 with the IRS. When it does, it’s recognized as an S corporation. If it does not, it will be taxed under Subchapter C of the IRS code and be taxed—you guessed it— as a C Corp.
Not all corporations may choose S corp status; to do so the business must meet certain IRS requirements regarding the maximum number and type of shareholders, as we’ll cover in a moment.
Taxation: C corporations get taxed twice: the corporation itself pays corporate income tax and shareholders pay federal income taxes on dividends. This is referred to as “double taxation.”
S corporations are what’s known as “pass-through entities.” The S corp doesn’t pay taxes itself; instead shareholders (owners) report business income (and possibly losses) on their personal tax returns. There’s no corporate tax.
Ownership: C corps don’t have restrictions when it comes to ownership. Anyone can be shareholders, including other businesses and foreign individuals or entities. There can be as many owners as you’d like.
With S corps you are limited to 100 shareholders who must be individuals and U.S. citizens.
Another important distinction is that S corporations only have one class of stock while C corporations may have multiple classes of stocks (such as preferred or common stock).
S Corp vs C Corp Tax Differences
The biggest difference between C and S corporations is how they will be treated for tax purposes. C corporations pay tax on their income at the corporate level, plus shareholders pay taxes on the profits distributed as dividends.
S corporations don’t pay income taxes directly. Instead they file IRS Form 1120S; that’s an informational return that reports income and expenses to the IRS. Profits or losses will then be reported on Form K-1 that the owners file with their personal tax returns. Again, profits or losses flow through to the individual shareholders.
S Corp Taxes
Tax benefits are among the S corporations’ biggest advantage. S corp owners report business income and loss on their personal income tax returns and they may be able to lower their tax bills in several ways.
- Business owners may be able to take advantage of legally available tax deductions, such as the home office deduction, auto mileage expense deduction and more.
- S corp owners who work in their business may achieve tax savings by paying themselves a salary subject to payroll taxes, then taking some income as distributions not subject to payroll taxes. This can result in lower payroll taxes than, say, a business operating as a sole proprietor who has to pay the full self employment tax.
- S Corps owners may deduct up to 20% of qualified business income on their personal tax returns using the Qualified Business Income (QBI) Deduction. Not all income is eligible (for example, wages are not). Among the eligibility requirements, total taxable income in 2022 must be $170,050 or less for single filers or $340,100 for joint filers. These limits rise in 2023, to $182,100 for single filers and $364,200 if you file jointly. You may be eligible for a partial deduction above those limits but the rules become more complicated. QBI is available to sole proprietorships and partnerships but not C corp shareholders.
- With an S Corp, you may be able to deduct business losses on personal tax returns, subject to certain limitations.
C Corp Taxes
Corporations file tax returns and pay taxes on corporate profits. Corporations have access to numerous business tax deductions including salaries, health care benefits, retirement plan contributions, education expenses for employees and more.
However, C corporations can’t deduct the money they pay to shareholders as dividends, and C corp shareholders may not have access personally to the tax write-offs owners of other types of business structures do. (You can’t take a home office deduction as an employee of a C corp, for example.) Shareholders also cannot deduct C corp losses on their personal tax returns.
S Corp vs C Corp Ownership Differences
S Corp Ownership
If you are fine with more limited ownership options, an S corp may work for you. Again, you can have up to 100 shareholders who must be U.S. citizens. Who can’t own an S Corp? Another corporation, trust or LLC.
There’s also only one class of stock allowed.
C Corp Ownership
C Corps don’t have any restrictions on ownership. If you’re planning on selling your company in the future — or looking for funding through investors — a C corp is often preferred. You can have an unlimited number of shareholders. Shareholders can be other C Corps, S Corps, other corporations, and trusts, and foreign owners are allowed.
Multiple classes of stock are permitted. This means you can have some shareholders who have voting rights and others who do not, for example.
When Does It Make Sense to Be an S Corp?
S corporations are often popular with high earning small business owners of companies with one or two owners who want to reduce their tax burden. As we’ve mentioned before, owners may pay themselves a salary subject to payroll taxes, as well as distributions that are not. In addition, S corp owners may be able to take advantage of various business tax deductions. And they may be able to deduct losses.
In addition to the double taxation of C corps, tax preparation and filing may be more expensive as a C corp.
Overall, an S corp will be easier to form and maintain than a C corp. And when it comes to getting financing you will have plenty of options provided you meet lender’s requirements for time in business and revenues.
Do You Save Money As An S Corp?
You may save money as an S corp versus a sole proprietorship or a C Corp. (LLCs have choices in terms of how they are taxed.)
But how much you can save depends on your specific situation. It will depend on how much profit the business makes, your personal income tax rate, and other factors. A tax professional can help you choose the right option for your business.
Why Would You Choose a C Corp Over an S Corp?
If you’re hoping to one day sell your company to another one, or to get venture capital or other investment funding in the meantime, you might want to operate as a C Corp. Since C corporations have a lot of flexibility in terms of ownership and the types of shares of stock that may be offered, they are more appealing to investors and may be easier targets for acquisition. Again you can have many many owners as you’d like and different classes of shareholders.
Another potential advantage of a C corporation is that it may be easier to access small business loans and corporate credit cards without a personal guarantee. The corporation will still need to meet lender requirements in terms of revenue and time in business (startups are risky) but if it does, it may be able to get financing solely in the name of the business.
More Options to Consider
You may have options beyond an S corp or C Corp. For instance, you can set up your business as a partnership, trust/estate, sole proprietor or LLC. If you plan to be the sole owner of your company, for example, you might choose to operate as a sole proprietor or a single-member LLC.
But keep in mind that as a sole proprietor, there’s virtually no distinction between you and your company. If your company accrues debt, you’re personally responsible for paying it off. And if you don’t, your personal assets could be at risk for that debt.
As an LLC (as with a corporation) there is limited liability protection. In the case of an LLC, liability is limited to the investment you put into your company. Forming an LLC may protect you personally if the business is sued.
And here’s another option to explore: form an LLC and elect to be taxed as an S corporation.
Forming an LLC and choosing to be taxed as an S corporation may be a good way to reduce your tax burden while avoiding some of the corporate formalities associated with a corporate structure.
There’s one more option to consider. You may be able to form an S corporation now and later convert it to a C corporation later. That will involve paperwork and perhaps some additional cost to pay an attorney and/or your CPA to help you with the conversion, but it’s good to know you have options.
Have at it! We'd love to hear from you and encourage a lively discussion among our users. Please help us keep our site clean and protect yourself. Refrain from posting overtly promotional content, and avoid disclosing personal information such as bank account or phone numbers.
Reviews Disclosure: The responses below are not provided or commissioned by the credit card, financing and service companies that appear on this site. Responses have not been reviewed, approved or otherwise endorsed by the credit card, financing and service companies and it is not their responsibility to ensure all posts and/or questions are answered.
9 responses to “S Corp vs C Corp: What’s the Difference?”
Great artical but one extremely important advantage of a C corp is its ability to defer incurring taxes using retained earnings.
This was very helpful but I do have some questions. Can you have an LLC and then later turn it into an S Corp? If, so how would you go about that?
It is often possible to convert an LLC to an S Corp as long as it qualifies. Usually that involves filing the proper forms with the state in which you incorporate. We recommend you consult with an attorney both to choose the right structure now as well as to be aware of any implications if you decide to change your business structure. Also keep in mind that LLCs may choose to be taxed as S Corps.
This was very informative, especially for aspiring entrepreneurs.
This sight was amazing, I am just starting a handyman business and this sight explained everything perfectly. I had a lot of questions about C Corp and S Corp and LLC and I have found all the answers to them, I’ve checked out so many other sights and read many other PDFs books etc. and nothing has explained the S and C Corp the way this did.
what’s the key differences between a c corporation filing as an s corporation vs llc filing as an s corporation? it feels like these are 2 very different paths to get to a similar place
There seems to be some inaccuracies in this article. Under S Corp vs C Corp Tax Disadvantages / C Corp Taxes, it states “Double taxation is the biggest downfall for C Corps. Your company’s revenue is taxed …”. It’s my understanding that corporate profits, not revenue, is taxed. Also, the way you’re defining double taxation seems political. Conservatives tend to view any money that is taxed more than once as “double taxation”, whereas the more appropriate definition would be that double taxation occurs if a single entity (person or company) is taxed twice. If corporation is taxed on revenue, and then a shareholder is taxed on income derived from that same revenue, that’s not double taxation since each entity paid taxes only once. If you were believe the former definition of double taxation, then technically all money is double, triple, quadrupled taxed as it passes through the economy.
Thanks for clearing that up, it helped me make the right decision.
This was a real help for us it really lays out the differences between the options that are out there when setting up a business. thank you.