C Corp vs. S Corp: Which Fits Your Business?

The core difference: how income is taxed

A C corp pays corporate income tax, and shareholders pay tax on dividends. An S corp passes profit through to owners' personal returns.

With a C corp, profit is taxed at the corporate level, and dividends are taxed again to shareholders. This is often called double taxation. An S corp is a pass-through: income is reported on owners' personal returns, whether or not it was paid out. Tax rates and rules change, so ask your accountant for current numbers.

Eligibility and ownership rules

S corps have limits on the number and type of shareholders and on stock classes. C corps have no such limits.

To elect S status, a company generally must be a domestic corporation with a limited number of eligible shareholders, typically individuals and certain trusts, and one class of stock. C corps can have unlimited shareholders, foreign owners and multiple stock classes, which is why venture-backed companies are usually C corps. Confirm current IRS rules at IRS.gov or with a tax professional.

Side-by-side comparison

S corps suit closely held, profitable small businesses. C corps suit companies planning to raise outside equity or reinvest heavily.

Payroll and the reasonable salary rule

S corp owners who work in the business must pay themselves a reasonable salary through payroll before taking distributions.

The IRS expects salary to reflect the work done. Distributions beyond that are not subject to payroll taxes in the same way, which is a reason some owners choose S status. Underpaying salary can trigger problems. This is a place where a professional's advice pays for itself. See single-member LLC taxed as an S corp.

Funding and growth considerations

Structure affects how you raise money. Equity investors prefer C corps, while lenders mainly review cash flow, credit and collateral.

If you plan to sell shares to investors, a C corp is usually expected. For loans and working capital, the structure matters less than your revenue and credit. Many funders ask for a personal guarantee regardless of structure. Read choosing the right business entity and what an LLC is to compare other options.

Costs and paperwork

Both structures require formal records, but the details differ.

Corporations of either type need bylaws, a board or its equivalent, minutes and a stock ledger. C corps file their own corporate return. S corps file an information return and issue statements to shareholders. States may charge franchise taxes or annual fees on both. Missing filings can risk your liability protection, so build a calendar and ask your accountant or attorney to set it up in the first year.

Mistakes to avoid

The common errors are electing S status too early, underpaying yourself and missing deadlines.

Ask your accountant when S status begins to save money, since it often needs steady profit to outweigh the extra payroll cost. Pay a reasonable salary and document how you set it. Mark the election deadline and annual filings on your calendar. Review the choice every year as profit and plans change.

How to decide and when to switch

Compare expected profit, owner pay, growth plans and investor needs with your accountant. Changing later is possible but has tax consequences.

1. Estimate profit for the next two to three years.
2. Decide whether you will seek outside investors.
3. Ask your accountant to model taxes under each structure.
4. Check state taxes and filing fees.

Whatever you choose, keep business and personal money separate. When you are ready to fund growth, ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue for any structure. Apply with a soft credit pull.