Entity comparison
S Corp vs C Corp: Complete Tax & Legal Comparison
Choosing between an S Corporation and a C Corporation is one of the most consequential decisions a business owner can make. The entity structure affects your annual tax bill, how you can raise capital, who can own your company, and how much paperwork you file each year. This guide breaks down every material difference — taxation, ownership rules, compliance requirements, and the scenarios where each structure wins.
Both entities provide the same core benefit: limited liability protection. Your personal assets are generally shielded from business debts and lawsuits. But the tax treatment, ownership flexibility, and long-term strategic implications are vastly different. If you are forming a new business or reconsidering your current structure, understanding these differences before you file can save you thousands of dollars annually.
01 · Overview
The two entity types at a glance
S Corporation
Pass-through taxation
- · No federal income tax at the entity level
- · Profits flow through to shareholders' personal returns (Schedule K-1)
- · Shareholders pay ordinary income tax on their share
- · Maximum 100 shareholders (U.S. citizens/residents only)
- · One class of stock allowed
- · Qualified for §199A QBI deduction
C Corporation
Double taxation
- · Federal corporate income tax: flat 21% on net profits
- · Shareholders pay a second layer of tax on dividends
- · Unlimited shareholders (including foreign investors)
- · Multiple classes of stock (common + preferred)
- · No shareholder residency restrictions
- · NOT eligible for §199A QBI deduction
02 · Tax
How each entity is taxed
S Corp taxation
An S Corp files Form 1120-S annually, reporting its income, deductions, and credits. The entity itself pays no federal income tax. Instead, each shareholder receives a Schedule K-1 showing their share of income, which flows to their personal Form 1040 and is taxed at ordinary rates.
The S Corp also pays employer-side FICA on any W-2 salary paid to shareholder-employees. The remaining profit — taken as a distribution — escapes the 15.3% payroll/self-employment tax layer. This is the core tax advantage of the S Corp election.
C Corp taxation
A C Corp pays a flat 21% federal corporate income tax on its net profits (Form 1120). If the corporation distributes profits as dividends, shareholders pay a second layer of personal income tax on those dividends. This creates the well-known "double taxation" problem.
However, double taxation only applies if the C Corp actually distributes dividends. Many C Corps retain earnings for reinvestment, deferring the shareholder-level tax. Additionally, C Corp shareholders who also work for the corporation can receive W-2 salaries — deductible to the corporation — which reduces the double-tax burden.
Tax example: $200,000 net profit, single owner
S Corp (salary: $80K)
Entity-level tax: $0
FICA on $80K salary: ~$12,240 (employer half)
Distribution: $120K (no FICA)
Income tax on $200K: at owner's marginal rate
C Corp
Corporate tax (21%): $42,000
Remaining profit: $158,000
Dividend tax (15% LTCG): $23,700
Total tax: ~$65,700
This is a simplified illustration. Actual results depend on salary structure, retained earnings, state taxes, and the owner's personal tax bracket. The S Corp avoids entity-level tax entirely; the C Corp pays two layers.
03 · Ownership
Ownership and structure rules
S Corp restrictions
- · Maximum 100 shareholders
- · Shareholders must be U.S. citizens or residents
- · Partnerships and most corporations cannot be shareholders
- · Only one class of stock (voting differences within one class are allowed)
- · Cannot be owned by another corporation or partnership
C Corp flexibility
- · Unlimited shareholders
- · No citizenship or residency restrictions
- · Foreign investors and entities can hold shares
- · Multiple classes of stock (common, preferred, etc.)
- · Can be owned by other corporations, partnerships, trusts
04 · Decision
When to choose each entity
Choose S Corp when:
- · You're a solo owner with consistent net profit above $60K–$80K
- · You want to minimize self-employment tax on distributions
- · You qualify for the §199A QBI deduction and want to keep it
- · You don't need venture capital or multiple stock classes
- · All shareholders are U.S. citizens or residents
Choose C Corp when:
- · You're raising venture capital or angel investment
- · You need multiple stock classes (common + preferred)
- · You have foreign investors or institutional shareholders
- · You plan to reinvest profits rather than distribute them
- · You want to offer Incentive Stock Options (ISOs) to employees
The hybrid path: LLC taxed as S Corp
Most solo business owners don't need a C Corp at all. The most tax-efficient structure for a profitable single-owner business is often an LLC taxed as an S Corp. You get the liability protection of an LLC, the pass-through taxation of an S Corp, and the ability to split your compensation into salary + distribution — all without the double taxation of a C Corp.
Use the BizTaxMetrics calculator to model whether the S Corp election saves money at your profit level.
05 · Compliance
Ongoing compliance and administrative burden
Federal filing requirements
S Corp
- · Form 1120-S (informational return — no entity-level tax)
- · Schedule K-1 for each shareholder
- · Form 941 quarterly payroll filings
- · Form 940 annual federal unemployment
- · W-2s for owner-employees
- · State-level annual report / franchise tax filing
C Corp
- · Form 1120 (entity-level tax return)
- · Form 1099-DIV for dividend distributions
- · Form 941 quarterly payroll filings (if employees)
- · Form 940 annual federal unemployment
- · W-2s for employees (including owner-employees)
- · State-level corporate income tax return
The S Corp's informational-only filing (Form 1120-S) is simpler and less expensive to prepare than the C Corp's Form 1120, which requires calculating and paying the corporate income tax. Most small-business CPAs charge $500–$1,500 for an S Corp return and $1,000–$3,000 for a C Corp return, depending on complexity.
Annual compliance costs (estimated)
S Corp
State filing fees: $0–$800/year (varies by state)
CPA fees: $500–$1,500/year
Payroll service: $200–$600/year
Bookkeeping: $500–$2,000/year
Total estimated: $1,200–$4,900/year
C Corp
State filing fees: $0–$800/year (varies by state)
CPA fees: $1,000–$3,000/year
Payroll service: $200–$600/year (if employees)
Bookkeeping: $500–$2,000/year
Total estimated: $1,700–$6,400/year
These are illustrative ranges. Actual costs depend on your state, transaction volume, whether you use a CPA or DIY bookkeeper, and how many owners the entity has. The S Corp is generally less expensive to maintain because it avoids the entity-level corporate income tax return.
06 · State taxes
How states tax S Corps and C Corps differently
State tax treatment is where many business owners are surprised. While the federal tax structure is consistent across all 50 states, each state layers its own rules on top. Some states fully recognize the federal S Corp pass-through treatment; others impose separate entity-level taxes that can significantly reduce or eliminate the S Corp's federal tax advantage.
States with no state income tax (S Corp-friendly)
Texas, Florida, Wyoming, Nevada, South Dakota, Washington, Alaska, Tennessee, and New Hampshire have no general state income tax. An S Corp in these states avoids state-level income tax on pass-through income, though most still charge a small annual franchise or report fee. Nearly all of the federal payroll-tax savings flows through to the owner.
States with entity-level S Corp taxes
California charges a $800 minimum franchise tax plus a 1.5% tax on net S Corp income (applied to net income over $250K). New York City imposes a General Corporation Tax on S Corps. Tennessee has a franchise and excise tax that can apply to S Corps. These state-level taxes can reduce or eliminate the federal payroll-tax savings, so run the numbers for your specific state before electing S Corp status.
States with no entity-level S Corp tax
Most states — including Texas, Florida, Illinois, Pennsylvania, Ohio, Georgia, North Carolina, Michigan, and Virginia — fully recognize the federal S Corp election and do not impose a separate entity-level tax. The S Corp income passes through to shareholders and is taxed only at the individual level. These states are the most favorable for the S Corp election.
The BizTaxMetrics calculator automatically folds your state's annual fee into the modeled benefit. Use the state-by-state pages to see how each state's fees and taxes affect your S Corp savings. If you are considering relocating your business entity to a more tax-favorable state, consult a CPA — most states tax income earned while you lived or worked there, regardless of where the entity is formed.
07 · Conversions
How to convert between S Corp and C Corp
C Corp to S Corp election
To convert a C Corp to S Corp treatment, file IRS Form 2553 (Election by a Small Business Corporation). The election must be filed by the 15th day of the 3rd month of the tax year to be effective for that year. For example, for a calendar-year corporation, the deadline is March 15. Late-election relief is available under Rev. Proc. 2013-30 for entities that miss the deadline.
You must also meet all S Corp eligibility requirements at the time of election: 100 or fewer shareholders, all shareholders must be U.S. citizens or residents, only one class of stock, and no corporate or partnership shareholders. If your C Corp has multiple classes of stock or foreign shareholders, you will need to restructure before electing S Corp status.
State-level filings are typically required in addition to the federal election. Many states require a separate state S Corp election form or notification. California, New York, and Texas each have their own processes. Check with your Secretary of State or a CPA familiar with your state's requirements.
S Corp revocation (S Corp to C Corp)
To revoke S Corp status and revert to C Corp taxation, the shareholders holding more than half of the outstanding shares must consent to the revocation. The revocation is filed with the IRS and can specify a future effective date or be effective for the current tax year if filed by the filing deadline.
Once revoked, the entity is taxed as a C Corp starting on the specified date. The revocation is generally irrevocable for five years without IRS consent. This is a significant decision — make sure you understand the tax implications before proceeding. A CPA can model the cost of the double-tax layer at your income level.
LLC to S Corp (the most common path)
The most common scenario is not a C Corp-to-S Corp conversion — it is an LLC electing S Corp tax treatment. A single-member LLC can file Form 2553 to elect S Corp status. The LLC retains its state-level liability protection and operational flexibility, while the federal tax side mirrors an S Corporation. This is the path most small-business owners take when the S Corp election makes financial sense.
Use the BizTaxMetrics calculator to model whether the S Corp election saves money at your profit level. The calculator shows the federal payroll-tax difference and subtracts your state's annual fees and a modeled admin overhead.
08 · FAQ
Frequently asked questions
What is the main difference between an S Corp and a C Corp?
The main difference is taxation. A C Corp pays federal corporate income tax on its profits (currently a flat 21%), and shareholders pay a second layer of tax on dividends. An S Corp is a pass-through entity — profits flow directly to shareholders' personal returns, avoiding the double-tax layer.
Can an LLC be taxed as a C Corp?
Yes. A single-member or multi-member LLC can elect C Corp tax treatment by filing IRS Form 8832 (Entity Classification Election). Once elected, the LLC is taxed as a corporation at the entity level.
How many shareholders can an S Corp have?
An S Corp is limited to 100 shareholders. Shareholders must be U.S. citizens or residents, certain trusts, or certain tax-exempt organizations. Partnerships, most corporations, and nonresident aliens cannot be S Corp shareholders.
Does a C Corp have more compliance requirements than an S Corp?
Both have similar entity-level compliance (state filings, annual reports, corporate minutes). However, a C Corp faces a separate corporate income tax return (Form 1120) at the entity level, while an S Corp files Form 1120-S but pays no entity-level income tax. The S Corp still requires payroll filings for owner-employees.
Can an S Corp convert to a C Corp?
Yes. An S Corp can revoke its S Corp election, which causes the entity to be taxed as a C Corp. The revocation requires consent of shareholders holding more than half of the outstanding shares and must be filed with the IRS. State-level requirements may also apply.
Which is better for a startup seeking venture capital?
C Corps are generally preferred by VCs and angel investors. C Corps can issue multiple classes of stock (common and preferred), have unlimited shareholders, and can be structured for tax-advantaged equity compensation (ISOs). S Corps cannot issue preferred stock and are limited to 100 shareholders.
What is the tax rate difference between S Corp and C Corp?
An S Corp pays no entity-level federal income tax — all profit passes through to shareholders at their ordinary income tax rates. A C Corp pays a flat 21% corporate tax on profits, and dividends are taxed again at 0%, 15%, or 20% depending on the shareholder's income. The combined effective rate on distributed C Corp income can exceed 35%.
Can an S Corp have foreign shareholders?
No. S Corp shareholders must be U.S. citizens, U.S. residents (green card holders or qualifying residents), certain trusts, or certain tax-exempt organizations. Nonresident aliens, foreign corporations, and most partnerships cannot hold S Corp stock.
How does state tax treatment differ for S Corp vs C Corp?
Most states recognize the federal S Corp election and tax the entity as pass-through. However, some states impose separate entity-level taxes on S Corps — for example, California's $800 minimum franchise tax plus a 1.5% tax on net S Corp income. C Corps in California pay 8.84% on net income. State-level tax treatment varies significantly.
Which entity is better for real estate investments?
It depends on the strategy. C Corps can be useful for retaining earnings and reinvesting in properties, but the double-tax layer makes distributions expensive. S Corps and LLCs (taxed as pass-through) are generally preferred for real estate holding because income flows through without entity-level tax. Consult a tax advisor for your specific situation.
Do S Corps and C Corps have different liability protection?
Both entities provide the same fundamental liability protection — shareholders are generally not personally liable for the corporation's debts and obligations. The corporate veil can be pierced in both cases if formalities are not maintained, dividends are not paid, or personal and business assets are commingled.
Can a C Corp convert to an S Corp?
Yes. A C Corp can elect S Corp treatment by filing IRS Form 2553. The election must generally be filed by the 15th day of the 3rd month of the tax year to be effective for that year. Late-election relief is available under Rev. Proc. 2013-30. State-level filings may also be required.
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See the numbers for your situation.
The BizTaxMetrics calculator models the federal payroll/SE tax difference between an LLC and an S Corp election — adjusted for your state's annual fees. Run your numbers.