S corps and C corps have much in common, but the differences can affect all aspects of how you do business. When choosing a business structure, consider your shareholders’ needs and your short and long-term business goals.
One of the most important decisions you’ll make as a business owner is selecting the right corporate structure. Both C corporations and S corporations offer limited liability protection, but they differ significantly in taxation, ownership flexibility, and operational requirements. Understanding these distinctions can save you thousands of dollars annually—and position your company for long-term success.
What C Corps and S Corps Have in Common
Before diving into their differences, it’s important to recognize what these two corporate structures share:
Both C corps and S corps are separate legal entities formed by filing Articles of Incorporation with the state. Both provide limited liability protection, meaning shareholders typically aren’t personally responsible for business debts. Both require corporate formalities such as adopting bylaws, issuing stock, holding shareholder and director meetings, and maintaining a registered agent.
The key distinction lies in how the IRS treats them for tax purposes—C corporations are taxed under Subchapter C of the Internal Revenue Code, while S corporations elect special tax treatment under Subchapter S.
C Corporation: The Default Corporate Structure
A C corporation is the standard corporate entity under IRS rules. When you incorporate without making a special election, your business automatically becomes a C corp.
Key characteristics of C corporations:
C corps pay corporate income tax on profits at the federal level (currently a flat 21% rate), plus any applicable state taxes. When the corporation distributes profits to shareholders as dividends, those shareholders pay personal income tax on the dividends—creating what’s known as “double taxation.”
However, C corps offer significant advantages for certain businesses. They can issue multiple classes of stock, making them attractive to venture capital investors. There’s no limit on the number of shareholders, and shareholders can include foreign nationals, other corporations, and various types of trusts. C corps can also fully deduct the cost of employee benefits like health insurance for owners.
For businesses planning to go public, seek outside investment, or retain significant earnings within the company for reinvestment, the C corp structure often makes the most sense.
S Corporation: The Pass-Through Alternative
An S corporation isn’t a different type of corporation—it’s a tax election. By filing IRS Form 2553, an eligible corporation can elect S corp status and avoid corporate-level taxation.
Key characteristics of S corporations:
S corps are “pass-through” entities, meaning profits and losses flow directly to shareholders’ personal tax returns. The corporation itself doesn’t pay federal income tax. Shareholders report their share of business income and pay taxes at their individual rates, avoiding the double taxation that C corp owners face.
S corp owners who work in the business must pay themselves a “reasonable salary,” which is subject to payroll taxes. However, any additional profits distributed as dividends are not subject to self-employment or payroll taxes—creating potential tax savings for profitable businesses.
S corp eligibility requirements include:
Must be a domestic corporation
Cannot have more than 100 shareholders
All shareholders must be U.S. citizens or residents
Can only issue one class of stock
Certain types of businesses (like financial institutions and insurance companies) are ineligible
Tax Implications: A Practical Comparison
The tax differences between these structures can be substantial. Consider a business earning $200,000 in annual profit:
C Corp scenario: The corporation pays 21% federal corporate tax ($42,000). If the remaining $158,000 is distributed as dividends, shareholders pay an additional 15-23.8% in dividend taxes. The total tax burden can exceed 35% of original profits.
S Corp scenario: No corporate-level tax is paid. The owner takes a reasonable salary (subject to payroll taxes) and receives the remaining profit as a distribution taxed only at their individual income tax rate—often resulting in significant savings.
For many small to mid-sized Texas businesses, the S corp election can save $10,000 to $40,000 or more annually in taxes. However, the right choice depends on your specific circumstances.
Which Structure Is Right for Your Business?
Consider a C corporation if you:
Plan to seek venture capital or angel investment
Want to offer multiple classes of stock
Need foreign or corporate shareholders
Plan to take your company public
Want to retain substantial earnings for business growth
May qualify for Qualified Small Business Stock (QSBS) exclusions on capital gains
Consider an S corporation if you:
Want to avoid double taxation
Have a smaller group of U.S.-based shareholders
Plan to distribute most profits to owners
Want to reduce self-employment taxes on business income
Operate a service-based or owner-operated business
Making the Transition
Already have a corporation and wondering if you should change your tax status? C corps can elect S corp status by filing Form 2553 with the IRS, provided they meet all eligibility requirements. However, the conversion involves complex tax considerations, including potential built-in gains taxes.
Similarly, businesses currently operating as LLCs or sole proprietorships may benefit from incorporating and electing S corp status once profits reach a certain threshold—typically when net income exceeds $80,000 annually.
Get Professional Guidance
Choosing between a C corp and S corp involves more than just tax calculations. Your decision affects your ability to raise capital, attract investors, compensate key employees, and plan for eventual sale or succession. The stakes are high, and the rules change frequently.
At Burk Law Firm, P.C., we’ve helped Austin business owners navigate corporate formation and restructuring decisions since 1992. We take a strategic approach to business law, ensuring your corporate structure aligns with both your immediate needs and long-term goals.
Ready to determine the best corporate structure for your business? Contact Burk Law Firm, P.C. at (512) 306-9828 or visit burklaw.com to schedule a consultation with our experienced business attorneys.