C-corp Vs. S-corp: Which Business Structure Is Right For You?

What Is a Corporation?

A corporation is a type of business entity created by filing articles of incorporation with the state. A corporation’s owners are known as shareholders, and a corporation also has officers and directors who run the business. As a legal entity, a corporation is considered separate from its shareholders, meaning shareholders aren’t personally responsible for debts of the corporation (liability for shareholders is limited to their investment in the business). Corporations are subject to a number of legal requirements and “corporate formalities” to which other types of businesses are not.

The terms “C-corp” and “S-corp” refer to tax classifications that are available to both corporations and limited liability companies (LLCs). Corporations are taxed as C-corps by default, but some corporations can elect S-corp taxation instead. LLCs are typically taxed as sole proprietorships or partnerships, but they can also choose to be taxed as C-corps or S-corps.

The Basics of C-Corps

A C-corp is the most common corporate tax status. Like the S-corp, it gets its name from the subchapter of the Internal Revenue Code under which it’s taxed. Tax requirements are the key attributes that make a C-corp a C-corp and an S-corp an S-corp.

A corporate income tax is first paid by a C-corp with a federal return (Form 1120) required by the IRS. Shareholders must then pay taxes on personal income at the individual level for any gains from dividends or stock sale. This arrangement is referred to as “double taxation” because of the taxes levied on dividends at both the corporate and individual levels. C-corp shareholders are not allowed to write off corporate losses to offset other income on personal income statements.

C-corps are desirable because there’s no restriction on who can own shares. Other businesses and entities both in and outside the United States can hold ownership of a C-corp. There is also no limit to the total number of shareholders. C-corp shareholders are also afforded the full liability protections of any corporation.

The Basics of S-Corps

The most defining characteristic of an S-corp is the so-called “pass-through” tax structure it offers. S-corps are exempt from a federal corporate income tax—instead, income from dividends is taxed only at the individual level. This also means if shareholders can meet certain criteria, corporate losses can offset income from other sources. S-corps receive all the same protection from liability offered by corporation status as a separate entity.

A number of strict stipulations to operate as an S-corp can disqualify or disincentivize a business that might otherwise seek the status. S-corporations can’t exceed more than 100 shareholders, effectively ruling out corporations that want to go public. Ownership is restricted largely to individuals, who must also be citizens or permanent residents of the U.S., and to certain domestic trusts, estates and tax-exempt organizations.

There’s no substitute for advice from licensed legal and tax professionals, but an overview of the pros and cons can point a business in the right direction and help its owners ask the right questions about forming a corporation or electing corporate status.

C-Corp Pros and Cons

C-Corp Advantages	C-Corp Disadvantages
Limited liability for all employees, shareholders, directors and officers.	Double taxation in which earnings and realized gains are taxed first under a corporate income tax and then again in the form of personal income for shareholders.
No restrictions on number of allowed shareholders.	No personal write-offs, meaning shareholders can’t write off business losses on personal income statements as some S-corp shareholders and members of other business structures are permitted to do.
No restriction on shareholders’ countries of origin or corporate statuses	Corporations have a more rigid structure and are more expensive and time-consuming to maintain than other business structures.
Easier to raise equity financing than S-corps or other forms of business structures.
Can issue more than one class of stock.
Lower maximum tax rate compared to the maximum personal tax rate that would apply to S-corps, sole proprietorships and partnerships.

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S-Corp Pros and Cons

S-Corp Advantages	S-Corp Disadvantages
Limited liability for directors, officers, shareholders and employees.	Maximum limit of 100 shareholders.
Pass-through taxation, avoiding the double taxation of C-corps.	Strict shareholder requirements stipulate only U.S. citizens, permanent residents and certain domestic trusts, estates and tax-exempt organizations can hold stock. Partnerships and corporations are ineligible to hold stock of S-corps.
Corporate losses can be passed through to owners in some cases.	Can only have one class of stock.
Independent life from shareholders, meaning the business can still continue on if key shareholders depart, just like a C-corp.	Harder to raise equity financing than C-corps.
File taxes annually, instead of quarterly.	More scrutiny from the IRS, especially with regard to the balance of salary payment versus dividends.
Can lead to a lower self-employment tax for LLC owners who elect S-corp status.	Corporations have a more rigid structure and are more expensive and time-consuming to maintain than other business structures.

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C-Corp vs. S-Corp Comparison Chart

While C-corps and S-corps share lots in common—such as limited liability for directors, officers and shareholders—it’s important to have a complete understanding of the key differences. Most of these have to do with taxes and limitations related to the taxation of the structure:

	C-Corp	S-Corp
Formation	Articles of Incorporation (C-corp is the default tax designation for corporations)	Articles of Incorporation plus IRS Form 2553: Election by a Small Business Corporation
Taxes: Gains	“Double taxation”: corporate income and personal income	“Single layer”: personal income tax only
Taxes: Losses	Cannot be written off on personal tax returns	If criteria is met, can be written off on personal tax returns
Taxes: Filing	Quarterly	Annually
Number of Shareholders	Unlimited	Maximum of 100
Type of Shareholders	All eligible entities	Individuals and some estates, trusts, tax-exempt orgs.
Origin of Shareholders	Domestic and/or international	Domestic only (citizen or permanent resident)
Classes of Stock	Multiple (can offer preferred)	Restricted to one class
IRS Scrutiny	Average, all else equal	Above average for balance of salary vs. dividends
Equity Financing	Easier to raise capital	Harder to raise capital

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Although they have many desirable characteristics, C-corps and S-corps are not the only kinds of business structures or designations. Here are some of the other options business owners or future business owners might consider:

Other Types of Corporations

• Benefit corporations or B-corps (sometimes called public benefit corporations or PBCs) are for-profit corporations balancing obligations to shareholders and public benefit. Importantly, this is not a federal tax designation but rather a state designation, available in a majority of states (but not all). A B-corp is usually also a C-corp and can elect S-corp status if it fits the criteria. B-corps should not be confused with “Certified B Corporations,” a certification granted by the nonprofit B Lab.
• Nonprofit corporations are incorporated for purposes other than profit for shareholders. These enjoy eligibility for key tax benefits at both the state and federal levels, including exemption from federal income tax.

Other Business Structures

• LLCs straddle the border between the corporate model and the partnership model. LLCs can be taxed like a C-corp or an S-corp if so elected and owners (known as “members”) enjoy limited liability protection but are not bound to the same regulations and administrative requirements as a corporation. While LLCs are easier for small business owners to form and manage, these structures aren’t as friendly to easy outside investment.
• Sole proprietorships are the simplest structure for a business, giving a single owner few regulatory burdens and a high degree of control and flexibility compared to a corporate structure. These are taxed only at the personal level and do not allow for the sale of stock, the existence of shareholders or business partners, or any limits on liability.
• Partnerships are similar to sole proprietorships when it comes to taxes and liability but involve an agreement between two or more owners. A limited partnership (LP) or limited liability partnership (LLP) may also be considered depending on the industry and other qualifying factors.

There is no one best option among the possible business structures and tax treatments. Choices regarding incorporation or business registration should be based on the specific situation of each business and owners should consult with legal and tax professionals during the business formation process. Regardless, it’s important to have a basic understanding of the options available and to remember many businesses evolve from one structure to the next as growth occurs.