An S corp and a C corp are the same kind of business under state law: a corporation, formed with articles of incorporation, owned by shareholders and protected from its owners' personal liability in the same way. The difference is federal tax. A C corporation pays income tax on its own profit, and its shareholders pay tax again on the dividends it pays them. An S corporation has elected, with IRS Form 2553, to pass its profit through to its shareholders' personal returns instead, which avoids that second layer, but only a corporation with at most 100 eligible owners and one class of stock can make the election.
The differences in one table
| C corporation | S corporation | |
|---|---|---|
| Formation | Articles of incorporation filed with the state | The same, plus Form 2553 with the IRS |
| Liability | Shareholders generally not personally liable | The same |
| Federal income tax | The corporation pays tax on its profit (Form 1120); shareholders pay tax again on dividends | Profit passes to shareholders (Form 1120-S and Schedule K-1), taxed at their individual rates |
| Losses | Stay in the corporation; shareholders cannot deduct them | Pass through to shareholders |
| Who can own it | Anyone, any number: people, companies, funds, foreign owners | Up to 100 shareholders; individuals, certain trusts and estates only; no nonresident aliens |
| Classes of stock | Any, such as common and preferred | One |
| Paperwork | Corporate records, payroll for working owners, Form 1120 | The same records and payroll, Form 1120-S and a K-1 for each owner |
What is double taxation?
The IRS puts it in two sentences: "The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax." The corporation gets no deduction for the dividends it pays (IRS: forming a corporation). The federal corporate rate is a flat 21% of taxable income (IRS Publication 542); dividends are then taxed on each shareholder's own return.
Profit
- Corporate tax
- A flat 21%, paid by the corporation
- The rest
- Taxed again when paid as dividends
Profit
- Passes to the shareholders
- Taxed once, at their individual rates
The same corporation under state law: only the federal tax differs.
An S corporation avoids this: its income, losses, deductions and credits flow through to the shareholders, who pay tax at their individual rates (IRS: S corporations). It is not entirely free of corporate-level tax: the IRS notes that an S corporation is still responsible for tax on certain built-in gains and passive income.
Which is better for a small business?
For a small business whose owners take the profit out, an S corporation usually avoids paying tax twice on the same money. A C corporation can make more sense when:
- The owners do not qualify. A partnership, a corporation, an investment fund set up as either one, or a nonresident alien cannot own S corporation stock.
- The business needs more than one class of stock, such as preferred shares for investors. Venture-backed startups are usually C corporations for this reason.
- Profit stays in the business. Profit a C corporation keeps is taxed only at the corporate rate until it is paid out; an S corporation's owners are taxed on all of it each year, whether or not it is distributed.
- The business plans to go public or have more than 100 shareholders.
State tax can change the answer: the SBA notes that some states tax S corporation profit above a limit and some do not recognize the S election at all (SBA: choose a business structure). A tax professional who knows your state should run the numbers.
How owners get paid
In both, an owner who works in the business is an employee and is paid a salary through payroll. In an S corporation that salary must be reasonable for the work: the IRS says S corporations "must pay reasonable compensation to a shareholder-employee in return for services" before taking distributions, and can reclassify distributions as wages when they are not (IRS: S corporation compensation). In a C corporation, salary is a deductible expense for the corporation and dividends are not.
Can a C corp become an S corp, and back?
- C to S: file Form 2553, signed by every shareholder, no more than 2 months and 15 days after the start of the tax year it should take effect, or during the year before (IRS Form 2553 instructions). The corporation keeps its EIN (IRS: when to get a new EIN).
- S to C: the election ends when it is revoked or when the corporation stops qualifying, for example by taking on an ineligible shareholder. Electing S status again generally needs IRS consent until the fifth tax year after the one in which it ended.
Can an LLC be an S corp or a C corp?
Yes, for tax. An LLC can elect to be taxed as a corporation with Form 8832, which makes it a C corporation for tax, or as an S corporation with Form 2553. It stays an LLC under state law. See LLC vs S corp and LLC vs corporation.
To form the corporation first, see articles of incorporation; the S election also needs an EIN (how to get one).
General information, not legal or tax advice. Facts checked 2026-11-04 against the official sources linked above; confirm with the state or the IRS before you file. How we check our facts · Report an error