Choosing the right business structure is an important decision for business owners. It impacts taxes, liability, and long-term success. When comparing an S corp to a C corp, understanding their requirements, qualities, and differences is crucial.
What Are S Corporations and C Corporations?
An S corporation and a C corporation are two distinct types of legal entities defined by the Internal Revenue Service (IRS). Both provide limited liability protection, safeguarding personal assets from business debts. However, their taxation and operational structures vary significantly.

Requirements for Forming an S Corp or C Corp
The requirements for forming these entities differ in ways that can significantly impact your business:
C Corporations
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Must file articles of incorporation in the United States.
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Can have unlimited shareholders, including individuals, corporations, and foreign investors.
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Requires adherence to strict corporate formalities such as maintaining bylaws and detailed records.
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Suitable for larger companies seeking significant investment opportunities.
S Corporations
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Limited to 100 shareholders, all of whom must be U.S. citizens or residents.
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Classified as a domestic corporation with one class of stock.
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Must elect S corp status by filing Form 2553 with the IRS.
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Typically operates on a calendar year unless special permissions are granted.
Both structures provide limited liability protection and create a separate entity from their owners, ensuring personal finances are shielded from business liabilities.
Differences in Taxation
Taxation is one of the most significant differences between the two structures.
C Corporations
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Subject to corporate income tax on profits at the corporate level.
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Earnings distributed to shareholders as dividends are taxed again at the individual level, resulting in double taxation.
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Best suited for larger companies with high gross receipts or those seeking to reinvest profits rather than distribute them.
S Corporations
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Operates as a pass-through entity, with profits and losses reported on the personal tax returns of shareholders.
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Avoids double taxation, which is advantageous for small businesses.
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Owners are not subject to self-employment tax on dividends, unlike a sole proprietorship or limited liability company.
Choosing the right tax structure depends on whether you prioritize minimizing taxes or attracting investment.
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C Corporations
Advantages
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Unlimited Shareholders: Attracts investments from individuals, larger companies, and foreign entities.
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Tax-Exempt Status: Eligible for nonprofit designation under certain conditions.
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Franchise Tax: Often offers deductions unavailable to S corps.
Disadvantages
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Double Taxation: Profits taxed at both corporate and individual levels.
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Complexity: Requires adherence to detailed corporate formalities and annual meetings.
S Corporations
Advantages
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Tax Benefits: Pass-through taxation eliminates the need for paying taxes at the corporate level.
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Limited Liability: Provides robust protection for personal assets.
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Simplicity: Ideal for small business owners with straightforward operations and limited gross receipts.
Disadvantages
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Shareholder Restrictions: Limited to 100 shareholders who must meet specific criteria.
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Voting Rights: Only one class of stock, restricting flexibility in ownership.
Choosing the Right Business Structure
The decision between an S corp and a C corp depends on your business goals:
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If you're seeking tax simplicity and reduced liability. S Corps are an excellent option for businesses with limited gross receipts and fewer shareholders.
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Opt for a C corporation if you’re a startup or larger company planning to raise capital or expand globally. The flexibility in ownership and funding makes a strong case.
For some, other structures like a sole proprietorship or limited liability company may be better alternatives, depending on your industry and objectives.
Get Ahead of Financial Decisions with Cathcap
Understanding the differences between an S corp and a C corp is essential for selecting the right corporate structure for your business. Both offer unique advantages and challenges, but the right choice will depend on your specific needs, such as tax obligations, ownership structure, and growth plans.
At Cathcap, we specialize in helping businesses navigate these crucial decisions. Contact us today for expert advice tailored to your business’s needs and take the first step toward securing your company’s future.
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