October 18, 2023

C Corps vs. S Corps: Know What’s Different Between Them

Mark Milastsivy

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As a business owner, you’ve probably heard of C Corps and S Corps. As you might expect, both of these business structures are corporations. But what’s the difference, and what does it mean for you as a founder?

Figuring out which structure is best for your business is an important step for any start-up. In this article, we’ll go over the differences between C Corps and S Corps and explain the implications for taxes, liability, compliance, and other key areas of your business.

TL;DR

C Corps face double taxation, while S Corps use pass-through taxation to avoid corporate income tax.
C Corps can issue unlimited shares and go public, unlike S Corps, which have ownership and stock limitations.
S Corps offer more flexibility in management for small businesses; C Corps require stricter governance.
Both structures require annual filings, but C Corps have heavier compliance burdens and higher tax exposure.
Both provide limited liability protection, but the right choice depends on your goals, funding plans, and scale.

What are C Corps and S Corps?

First, let’s go over the basics. A C Corp is the common name for the default corporation type under US law. If you incorporate a corporation in the US, it will be considered a C Corp unless you specifically request otherwise.

C Corps are responsible for corporate taxes on profits, and employees must also pay income tax on their own salaries. This is often known as double taxation.

S Corps, on the other hand, are corporations taxed as pass-through entities. In other words, the company’s profits and losses are passed on to shareholders, who are responsible for personal income tax. This allows businesses to avoid corporate income tax and double taxation, which could significantly lower their overall tax obligations.

C Corps vs S Corps: What are the Differences

Here are the four major differences between C and S corporations.

Difference	C-corp	S-corp	Which is better
Taxation	Pays 21% corporate tax, plus shareholders pay tax on dividends — double taxation.	No entity tax; profits pass through to owners' returns.	S-corp for lower total tax on distributed profits.
Shareholders & Stock	Unlimited investors; multiple stock classes; IPO ready.	Max 100 U.S. individual owners; one economic class of stock.	C-corp for rapid fundraising and public listing.
Management & Decision-Making	Formal board layers slow moves but assure investor oversight.	A single owner can fill all roles; faster action for small firms.	S-corp for quick decisions; C-corp for strong governance.
Compliance & Reporting	Files Form 1120, pays federal tax, heavier state fees, and records.	Files Form 1120-S, lighter state levies, fewer records.	S-corp if simplicity matters; C-corp if seeking big-ticket capital.

1. ‍Taxation

The most significant difference between C Corps and S Corps is in the way these two types of entities are taxed.

C Corps are subject to what is referred to as “double taxation.” Under the tax code, C Corps are required to pay taxes on any retained profits at the corporate level, as well as at the individual level in the form of income. Owners seeking to be paid through dividends will thus be stuck paying extra tax.

S Corps are still permitted to retain profits, but owners only pay taxes on the individual level. This is what’s referred to as a “pass-through” tax structure: profits and losses are passed through the business to the company’s shareholders, and appear on their personal tax returns.

2. Shareholders and Stock

This is where C Corps gets its competitive edge. Unlike S Corps, C Corps can offer an unlimited number of shares to an unlimited number of shareholders, and thus have no hard limit on growth.

C Corps can offer stock options to employees, and deduct the cost of employee benefits from its taxable income. C Corps also benefit from their ability to issue multiple classes of stock, which grants even greater flexibility to business owners.

While S Corps can also raise capital by offering stock, there are limits. S Corps cannot have more than 100 shareholders, and cannot make an initial public offering (IPO).

Unlike C Corps, S Corps can only issue one kind of stock (voting and non-voting shares are permitted, however).

3. Management and Decision-Making

The two corporation types follow the same basic corporate blueprint, shareholders elect a board of directors that hires officers, yet day‑to‑day control feels very different once the paperwork is filed.

C Corps must keep a distinct board and officer roster, even when there is only one founder. The board is expected to meet at least once a year, record minutes, approve major policies, and document executive compensation. Because decisions pass through several layers of oversight, strategic pivots or large expenditures usually require formal votes, slowing down reaction time but giving investors transparency and fiduciary protection.

S Corps use the same governance framework, yet most states let a single owner fill every role on the org chart. With fewer voices in the room, boards can schedule shorter meetings and sign resolutions quickly, so closely held businesses often act faster on operational changes. The trade‑off is that shareholder‑employees must still treat reasonable salaries as W‑2 wages, which the IRS scrutinizes during audits.

4. Compliance and Reporting Requirements

Corporations keep their status only by meeting a steady rhythm of federal and state filings.

C Corps file Form 1120 each year and pays the 21% federal corporate tax on profits left in the company. States add their own annual report or franchise‑tax returns; missing a deadline can trigger late fees, loss of good standing, or administrative dissolution. To stay compliant, bylaws, shareholder lists, and board minutes must be updated and stored with care; failure to do so can create personal liability for directors or even criminal penalties for falsified records.

S Corps submit Form 1120‑S instead of Form 1120, and the entity itself owes no federal income tax because profits flow directly to shareholders’ individual returns. At the state level, they still file annual reports and often a franchise tax return, though some jurisdictions apply a reduced rate to pass‑through entities. All the same corporate formalities – annual meetings, minutes, and bylaws- remain mandatory, but with fewer shareholders, the paperwork load is typically lighter.

What do C Corps and S Corps Have in Common?

Limited Liability Protection

As mentioned above, both C Corps and S Corps provide liability protection to their owners. This means that owners and shareholders cannot be held personally liable for financial losses or debts accrued by the business.

On a related note, both C Corps and S Corps are separate legal entities from their owners. They can enter into contracts, sue or be sued, and complete other business activities in their own name.

Compliance Requirements

Corporations, regardless of structure, must fulfill some basic compliance requirements in order to maintain their status.

These include:

Holding initial and annual shareholder meetings, and keeping appropriate minutes
Adopting bylaws
Recording stock transfers and keeping other business records

Final Thoughts

Both C Corps and S Corps have advantages and disadvantages. The structure that is best for your business depends on your unique needs and goals.

Because they allow for an unlimited number of investors, it’s more common for large businesses to be C Corps than S Corps.

But that doesn’t mean S Corps are never the right idea, or that organizing as an S Corp means your business won’t be able to grow at all.

Regardless of which you choose, be sure to be aware of the compliance requirements to make sure you don’t lose corporate status.

If you’re still feeling unsure, take Firstbase’s free survey to help figure out which company structure is right for you.