“Both are corporations. But what happens to your taxes, investors, and take-home pay? That’s where it gets real.”
So… You’re Ready to Go Corporate?
You’ve probably already read up on LLC vs. C Corp, or maybe you’re past the sole proprietorship phase and ready to go bigger. Good news: you’re now stepping into the world where things get formal—but also more powerful.
The moment you decide to incorporate, two words pop up fast: S Corp vs. C Corp.
And while they sound similar (and yes, both are “corporations”), the way they treat taxes, ownership, and profits are very, very different.
Without the legal mumbo jumbo, let’s break it down slowly.
What Even Is a Corporation in the U.S.?
Let’s start from the very top.
A corporation is its own legal identity, separate from the people who own it. It can create a bank account, sign contracts, hire staff, pay taxes, and even be sued under its own name.
It’s not “you doing business.” It’s the business doing business.
This separation gives you something powerful:
Limited liability. If your corporation gets into legal or financial trouble, your personal assets are protected.
So, They’re Both Corporations. Now, is there actually a real difference between an S Corp and a C Corp?
Yes—but not in the way most people think.
When you set up a corporation in the U.S., it’s automatically treated as a C Corporation. That’s the standard structure.
If you want to be treated as an S Corporation, you don’t form a different company—you simply file a tax election with the IRS (Form 2553) to change how your company is taxed.
So structurally? They’re the same:
- Both have shareholders
- Both need bylaws and a board of directors
- Both give you limited liability protection
But under the hood, they behave differently—especially when it comes to taxes and ownership.
Here’s where they split:
- How the company pays taxes (or doesn’t)
- Who’s allowed to own shares
- How easy it is to raise money or issue stock
Think of it like this: same car, different engine. One’s built for local cruising. The other’s designed for the highway, fundraising, and long-term growth.
S Corp vs. C Corp: At a Glance
| Feature | S Corporation | C Corporation |
| Taxation | Pass-through: profits taxed once | Double taxation: company & shareholders |
| Ownership limits | 100 shareholders max; U.S. residents only | Unlimited shareholders, global-friendly |
| Stock types | Only one class of stock | Multiple classes allowed |
| Best for | Small U.S.-based business owners | Startups, global founders, VC-backed |
| Entity type | Tax status (you elect it) | Default corporate form |
Think of an S Corp as a “small town, lean team” setup. A C Corp is more like a “big city, raise capital, go public” kind of thing.
Taxes: Where Things Really Split
S Corp
No corporate tax here. The profits “pass through” to your personal tax return.
It’s kind of like running a partnership or LLC—just wrapped in a corporate layer.
But heads-up:
- You must pay yourself a “reasonable salary”
- You’ll still have to cover or pay self-employment tax on that salary.
- You need to be a U.S. citizen or resident—foreigners can’t own an S Corp
- So yeah, if you’re a non-resident, S Corp is off the table. No loopholes there.
C Corp
- This one pays corporate income tax first.
- Then, if you (as a shareholder) take profits out as dividends—you get taxed again. That’s what folks are talking about when they say “double taxation.”
- But here’s the nuance: If you’re reinvesting profits into the company (instead of cashing out), the double tax doesn’t sting as much.
Ownership Rules (This Matters More Than You Think)
S Corp:
- Max 100 shareholders
- All must be U.S. citizens or residents
- No LLCs, foreign investors, or other corporations allowed as shareholders
- One class of stock only—no preferred shares
- It’s built for lean, domestic companies. Great for smaller businesses who want to keep things tight.
C Corp:
- No limits on the number of shareholders
- Can have foreign owners, LLCs, trusts, and multiple share classes
- More flexibility = better fit for startups, VCs, and global business setups
- Planning to raise money, issue equity, or attract foreign partners? C Corp is the way.
Compliance & Maintenance
Here’s what founders often overlook: what happens after you incorporate.
S Corp:
- Must run payroll for founders (you’re technically your own employee)
- Submit IRS Form 2553 to choose S Corp status.
- Annual W-2 forms and payroll tax reporting are required
- Lower state fees, but more rules around distribution and salary
C Corp:
- Needs formalities like annual meetings, board minutes, and bylaws
- Must file corporate tax return (Form 1120)
- Generally more paperwork—but also more flexibility
Profit Distribution
S Corp:
- Profits are distributed based on ownership percentage only
- No room for custom splits or rewarding based on work
- Distributions avoid self-employment tax—but the IRS will check if you’re underpaying yourself
C Corp:
- Can retain profits inside the company for future growth
- Can issue dividends, equity bonuses, or reinvest profits
- You get flexibility over how and when money is paid out
Real-World Fit (Best For…)
| Situation | Best Option |
| U.S. citizen, solo founder, profitable biz | S Corp |
| Planning to reinvest the profits instead of pulling cash out | C Corp |
| Wanting to offer stock options | C Corp |
| Running a U.S.-only, local service business | S Corp |
| Working with foreign co-founders or investors | C Corp |
| Applying to Y Combinator or raising from VCs | C Corp |
Culture Check: How the U.S. Sees These Structures
In the U.S., how you structure your company reflects how you plan to grow.
A C Corp says, “I’m building something scalable.”
An S Corp says, “I want to run lean and keep it local.”
U.S. culture loves freedom—but also clarity. You don’t need to impress anyone with big titles or investor-ready decks. But you do need to have your filings clean, your intentions clear, and your taxes sorted.
Whether you’re sending an invoice or pitching your first client, the way your business is structured tells people how serious you are—and what kind of business you’re running.
Which One’s Right for You?
Choose C Corp if:
- You have foreign co-founders or investors
- You plan to raise venture capital
- You need stock options or different share classes
- You’re building with scale, equity, or exit in mind
Choose S Corp if:
- You’re a U.S. citizen or resident
- You want to avoid double taxation
- You don’t need outside investors
- Your business is profitable, and you want tax efficiency
Bonus Note: How S Corps Work (and Don’t Work) for Startups
A lot of people Google “best tax structure for a startup.”
And while the S Corp’s tax perks look great on paper, it’s rarely the go-to for true startups. Why?
- You often aren’t profitable in the early years
- You can’t have foreign co-founders
- You can’t offer preferred stock
So yeah—S Corp is great for small business owners and consultants, but if you’re building the next Stripe? You’re going C Corp. So, form your U.S. company with lots of consideration.
Final Thought: Choose Based on Vision. Not Hype.
The right choice isn’t about what’s trending. It’s about:
- How do you plan to earn
- Who are you planning to partner with
- Whether you want simplicity or scale
So don’t just pick a structure because a YouTube video said so. Choose it because it matches your reality today—and your goals for tomorrow.
Because in the U.S., you can always dream big. But to build it? You’ve got to choose the structure that holds it all up.
FAQ
Is an S Corp a type of corporation, or something else?
Good question. It’s actually a tax status, not a separate legal structure.
You form a regular corporation, then elect to be taxed as an S Corp with the IRS. So “S Corp” just means how you’re taxed—not what you are.
Can a non-resident own an S Corp?
Nope. S Corps are for U.S. citizens or permanent residents only.
If you’re a non-resident or have international co-founders, go C Corp.
Which is better for a startup: S Corp or C Corp?
C Corp—hands down.
S Corps don’t allow multiple share classes, foreign investors, or VC-style equity structures. If you’re aiming to raise funds or grow fast, C Corp is the one.
Is an S Corp better for tax savings?
If you’re a small, profitable business with U.S. owners? Yes, because you avoid double taxation.
But remember: S Corps require you to pay yourself a reasonable salary, which is taxed like normal income. You’ll still pay self-employment taxes.
Do C Corps really get taxed twice?
Yes—but context matters.
The company pays tax on its profits. Then, if you take money out as dividends, you pay tax on that again.
But, if you are reinvesting into the company and not pulling cash? The double tax rarely shows up in the early years.
Can I switch from S Corp to C Corp later?
Yes, but it’s a bit of paperwork—and may have tax consequences.
So it’s better to pick the right one upfront based on your growth plans.
Which one is easier to maintain?
Technically, both need some paperwork—annual reports, board minutes, filings.
But S Corps have more IRS restrictions and ownership limits, so C Corp offers more flexibility, especially if you’re thinking long-term.
Can an LLC choose to be taxed as an S Corp?
Yes. Surprisingly, it can.
An LLC can choose to be taxed as an S Corp by submitting Form 2553 to the IRS. This lets you keep the LLC’s flexibility but tap into S Corp-style tax benefits.
