S-Corp vs C-Corp: a tax election, not different entities.
A side-by-side comparison of structure, tax treatment, liability protection, cost, and use cases. The decision usually comes down to a few specific factors; this guide walks through each.
S-Corp saves self-employment tax on owner distributions for profitable operating businesses. C-Corp is required for venture capital and offers QSBS. The choice depends on funding plans more than tax math.
Which fits your situation.
Based on publicly listed pricing and feature pages as of 2026. Competitor names are trademarks of their respective owners.
Every factor that matters.
| Factor | S-Corp | C-Corp |
|---|---|---|
| Federal tax | Pass-through to shareholders | Corporate income tax at 21% + dividend tax on distributions |
| Owner pay | Reasonable salary (W-2) + distributions (no SE tax on distributions) | Wages (W-2) or dividends; ordinary tax + 15-23.8% qualified dividend tax |
| Shareholder limit | 100 maximum | Unlimited |
| Shareholder eligibility | US individuals, certain trusts, certain estates only | Anyone: individuals, entities, foreign persons, partnerships |
| Foreign owners | No (excludes non-US persons) | Yes |
| Stock classes | Single class only (voting differences allowed; no economic preferences) | Multiple classes; common + preferred; convertible securities |
| VC compatibility | Generally no | Yes (standard structure) |
| Employee stock options | Limited (NSO only; no ISO) | Both ISO and NSO supported |
| QSBS (Section 1202) | Not eligible | Eligible if requirements met |
| Retained earnings | Pass through whether distributed or not | Retained at corporate level; taxed at 21% |
| Annual filing | Form 1120-S + Schedule K-1 | Form 1120 |
| Self-employment tax | None on distributions (salary only) | None (corporate level taxation instead) |
| State recognition | Most states recognize federal S-election; some (NJ, NY, others) require separate state election | Standard across states |
How each is taxed.
The S-Corp election (Form 2553) makes a Corporation a pass-through entity for federal tax. The Corporation files Form 1120-S, issues Schedule K-1 to each shareholder, and shareholders report their share of income on their personal returns. No double taxation.
For owner-operators, S-Corp election creates a tax-saving opportunity: the owner pays themselves a reasonable salary (subject to payroll tax) and takes the rest as distributions (not subject to self-employment tax). At $200k profit with $80k salary + $120k distribution, the SE tax savings are approximately $11k to $15k per year.
C-Corp files Form 1120 and pays 21% federal corporate income tax. Distributions to shareholders are taxed again as dividends (15-23.8% qualified rate plus state). Total federal+state rate can exceed 40% on distributed earnings.
C-Corp is more tax-efficient when most profit is retained at the corporate level for growth (taxed once at 21%). It is also better when QSBS applies, because Section 1202 can exclude up to $10M or 10x basis of capital gains on stock held more than 5 years.
What each costs.
S-Corp election costs $0 in IRS fees. Form 2553 is free to file. Our service fee is $99 standalone or included on Growth.
C-Corp has no federal election cost. The Corporation is C-Corp by default.
Both file federal tax returns annually. S-Corp files Form 1120-S; C-Corp files Form 1120. State filing fees and tax preparation costs are similar for both.
Protection differences.
Liability protection is the same for both. Both are Corporations under state law and provide the same liability shield. The S-Corp/C-Corp distinction is federal tax treatment only.
To maintain the liability shield: separate bank accounts, no commingling, regular board meetings, meeting minutes, file annual reports, follow corporate formalities.
Common questions.
Are S-Corps and C-Corps different entities?
When should I elect S-Corp?
Can I elect S-Corp on my LLC?
What is the S-Corp 60/40 rule?
Why can S-Corps not have foreign owners?
What is QSBS and why does it favor C-Corp?
Can I convert from S-Corp to C-Corp?
Can I convert from C-Corp to S-Corp?
What is the 100-shareholder limit?
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