Differences between C Corporation and S Corporation
C Corporation vs. S Corporation[edit]
A C corporation (C corp) and an S corporation (S corp) are two types of corporate structures in the United States that offer limited liability protection to their owners, legally separating business assets and liabilities from personal ones.[1][2][3] While both are formed by filing articles of incorporation with the state, they differ significantly in terms of federal taxation and ownership rules.[4][5] A business defaults to C corp status upon incorporation; to become an S corp, the business must meet specific Internal Revenue Service (IRS) requirements and file Form 2553 to elect a special tax status.[2]
The primary distinction lies in how they are taxed. A C corp is subject to "double taxation," where the corporation pays income tax on its profits, and shareholders are taxed again on any dividends they receive. In contrast, an S corp is a pass-through entity, meaning profits, losses, deductions, and credits are passed directly to the shareholders' personal tax returns, avoiding federal taxation at the corporate level.
Ownership structures also vary. C corporations have no restrictions on the number or type of shareholders, allowing for foreign and corporate ownership.[5] S corporations are limited to 100 shareholders, who must be U.S. citizens or residents, and cannot be other corporations or partnerships.[2]
Comparison Table[edit]
| Category | C Corporation | S Corporation |
|---|---|---|
| Taxation | Subject to double taxation: the corporation pays taxes on profits, and shareholders pay taxes on dividends. | Pass-through taxation: profits and losses are passed directly to shareholders' personal tax returns, avoiding corporate-level federal income tax. |
| Number of Shareholders | Unlimited. | Limited to 100 shareholders.[2] |
| Shareholder Eligibility | No restrictions; can include individuals, corporations, partnerships, and non-resident aliens.[5] | Restricted to U.S. citizens or residents; cannot be corporations or partnerships. |
| Classes of Stock | Can issue multiple classes of stock, such as common and preferred.[2] | Limited to only one class of stock.[2] |
| Formation | Default corporate status upon filing articles of incorporation.[2] | Must file Form 2553 with the IRS to elect S corp status after incorporation. |
| Flexibility in Raising Capital | More flexible due to the ability to have unlimited shareholders and multiple stock classes, which is attractive to venture capitalists and other investors.[5] | Less flexible due to limitations on the number and type of shareholders and having only one class of stock. |
Both C corps and S corps are required to adhere to corporate formalities, such as having a board of directors, holding regular meetings, and maintaining corporate records.[2] The choice between a C corp and an S corp structure depends on the business's goals regarding taxation, ownership, and plans for future growth and investment.[5]
