Tax Differences Between an S Corp and a C Corp

How each one is taxed

A C corporation is a separate taxpayer. It pays corporate income tax on its profits, and shareholders pay tax again on dividends they receive — the double taxation the structure is known for.

An S corporation passes profit and loss through to shareholders, who report it on their personal returns. The company itself generally pays no federal income tax on that profit.

The practical differences

S corporations carry eligibility limits: a cap on shareholder count, restrictions on who may hold shares, and a single class of stock. C corporations have none of those constraints, which is why companies raising outside investment usually stay C corps.

S corporation owners who work in the business must also pay themselves reasonable compensation through payroll before taking distributions — an area the IRS examines closely.

• C corp: taxed at the entity level, then again on dividends
• S corp: profit passes through to shareholders’ personal returns
• S corp: shareholder count and eligibility restrictions apply
• S corp: owner-employees require reasonable salary through payroll
• C corp: preferred structure for outside investment and multiple share classes

Which is right for your business?

It depends on profit level, whether you plan to raise capital, how much you take out versus reinvest, and your state’s treatment of each structure. The right answer also changes as the business grows — an election that suited you at $200k of profit may not at $2m.