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

As you establish and build your business, you may need to decide between operating as an S corp vs C corp. Both are corporations, but with differences in how they are taxed and who owns them.

You need to understand the difference between S corp and C corp formation because of the very real tax implications, ownership structure differences, and potential for growth. Neither is better than the other, since there are both advantages and disadvantages to both.

To help you, we’ll cover what each structure is and what makes them so different. We’ll then discuss C corp vs S corp benefits and when they may apply to your situation. Always talk to a tax professional before making these significant decisions for the operation of your business.

What S corps and C corps have in common

As corporations, both business forms have some similarities. They share:

• Formation process: To establish either, owners must file Articles of Incorporation with their state. This alerts the state of the presence of the business.
• Liability protection: Corporations have limited liability protection for shareholders. That means those who own and operate the business are not typically personally responsible for business debts and claims.
• Legal entities: Both S corps and C corps are separate entities. They have shareholders, directors, and officers that oversee and manage the organization. They are separate from the personal assets of those parties.
• Corporation rules apply: Both organizations must follow corporate formalities to operate. This includes establishing bylaws, holding annual meetings, providing stock insurance, maintaining a registered agent, and completing annual reports.

Keep in mind that the S or C designation relates to the federal tax election. It does not make any difference when it comes to your state tax filing.

S corp vs. C corp: the key differences

As similar as they seem, the difference between C corp and S corp is essential to understand. If you are a founder deciding between either form, or a small business looking for ways to adjust your tax obligations, consider these differences.

Taxation

The most significant difference between S and C corp designation is in the way they are taxed. This has direct implications for the amount and process of paying taxes within your business.

• C corp: C corporation taxes differ from S corp as they are taxed as a separate entity. They pay corporate income tax on the profits they produce. As of 2026, this is 21% of those profits paid in taxes. The profits are distributed to shareholders as dividends. Then, shareholders pay their personal income tax on the dividends they receive. C corp shareholders face double taxation as a result – on the profits and then again on the income they are paid.
• S corp: S corps are a pass-through entity. That means there are no corporate-level income taxes applicable. Instead, the shareholders report all profits and losses on their personal tax returns. This means you pay taxes at your personal income tax rate. This is done through the Schedule K-1. There is only one instance of taxation here.

There are some nuances to this process. For example, S corp owner-employees will pay payroll taxes only on the reasonable salary they report. They do not do so on distributions. That’s an important factor for a profitable small business looking to reduce taxation.

Before making a decision on an S corp or C corp for tax obligations, always speak to a tax professional familiar with your situation. Both areas have advantages and legal requirements to meet.

Ownership and shareholders

The next difference between S corp and C corp is in its ownership structure. Again, this has implications for the way you manage your business.

• C Corp: C corps have no ownership restrictions. That means individuals, other corporations, foreign entities, LLCs, and others can own shares in the company. There is no limit to the number of shareholders or how much share one party can own.
• S Corp: S corps have a restriction of no more than 100 shareholders. Additionally, all shareholders have to be US citizens or residents. Also, you can only own an S corp as an individual, some types of qualifying, exempt organizations, or certain trusts. Other corporations, LLCs, and partnerships cannot be shareholders of an S corp.

Ownership structure matters for multiple reasons. For example, S corps often find it more challenging to obtain venture capital for growth or institutional investment due to these restrictions. Most investors offering those sources of capital are ineligible shareholders within an S corp.

Stock classes

Another of the differences between C corp and S corp formation has to do with stocks. Both can offer stocks, but there are differences in the types of stocks issued:

• C corps: These often offer multiple classes of stock. Shareholders can issue common, preferred, or other options to fit their specific economic and organizational goals. If your business is seeking investors, some may prefer one or more types of stock classes. This also plays a role in the dividends and distributions you make to those shareholders later.
• S corps: S corps cannot offer preferred stock. Just one class is available. Note that you can form a shareholder agreement that distributes voting rights differently among your shareholders, even without separate stock classifications.

If your business is starting out and seeking to raise capital from an outside source, this designation matters significantly. Many investors only choose companies that can offer them preferred stock, as it protects more of their investment. In those situations, S corps become less desirable to investors.

Losses

Ideally, your business never loses money. Realistically, you need to have a plan for when it does. This is another difference to consider.

• C corp: When a C corp loses money, it’s at the corporate level. Your shareholders do not apply those losses to their personal tax calculations.
• S corp: By contrast, if your business loses money as an S corp, the pass-through to shareholders applies. That means those losses can offset your personal income.

There are limitations to this. Your tax professional will discuss this with you. This can be an important factor for smaller and unproven businesses.

Which is better, C corp or S corp?

There’s no universal factor in which one is better than the other. S corp vs C corp decisions are often made based on the following considerations:

S Corps tend to be the better decision when:

• You have an established business that’s profitable. But you want to reduce self-employment tax obligations through the salary and distribution split.
• Your business ownership is straightforward. You have 1 to 100 shareholders all based in the US.
• You don’t plan to seek institutional investors, and there are no intentions of going public at this time.
• You want the benefit of pass-through losses, which are common with many startup businesses.

C corps make better sense in situations where:

• Your business is planning to raise venture capital or institutional investments. You expect to welcome new investors into the fold, which means you cannot use an S corp if those investors are corporations or some funds.
• You plan to go public. If you plan to form an IPO to raise stock capital for your business, you need a C corp structure.
• You plan to prioritize your offerings with preferred stock to some investors. Again, this is not something you can do with an S corp designation.
• You plan to reinvest your profits because retained earnings are taxed at the 21% corporate rate, which may be lower than your personal tax rate.
• Your ownership is international or could be. This type of structure allows for international ownership.

How do you know which is best? Speak to a CPA and business attorney about your current and future growth plans. Analyze which structure will offer the most significant opportunities and tax savings based on where your company is now and where you plan to take it.

Switching from C corp to S corp (or vice versa)

What if you’re already one and want to move to the other? You can do so through several steps.

If you operate as a C corp now and want to become an S corp, you’ll file Form 2553 with the IRS. You’ll need to meet all S corp eligibility requirements. One thing worth understanding before you convert: if the business owns assets that had already gone up in value while it was a C corp, and the new S corp sells those assets within 5 years of the conversion, that built-in gain gets taxed at the corporate level (currently 21%), on top of whatever the shareholders owe personally. This is called the built-in gains tax, and it exists specifically to stop companies from converting to S status right before selling off appreciated property just to avoid corporate tax. If the S corp holds onto those assets past the 5-year mark, the built-in gains tax no longer applies.

If you operate as an S corp and want to become a C corp, you can do so by revoking your S corp election. You’ll file a statement of revocation to do so. There’s typically a five-year wait prior to re-electing.

In both situations, you must consider the tax obligations. Your CPA will discuss the short-term financial impact and long-term consequences of either decision. Getting it right from the start can matter.

Tailor Brands can help with incorporation, whether that be S corp or C corp election, and your business formation. If you’re ready to make the move or want more insight, and you want to get the structure right from the start, work with our team now.

Conclusion

S corps and C corps are both corporations, but with significantly different tax treatment and ownership rules. There’s no single strategy that’s best for every situation. Both have genuine advantages depending on your situation.

Before you decide, think about your current situation, growth plans, the ownership structure, and tax situation. It’s complex and definitely benefits from a CPA completing tax modeling and a business attorney considering legal formalities.

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