Not every business in the United States has to be a corporation. Many start as sole proprietorships or limited liability companies (LLC). But when founders decide to incorporate, the choice comes down to an S or C corporation. Both provide liability protection, yet they have different rules surrounding taxes, shareholders, and long-term strategy.
Read on to learn more about S corp vs. C corp business structures. We’ll show you what sets them apart and when one structure might better serve your company goals.
What is a C corporation?
A C corporation, or C corp, is one of the most common corporate structures in the United States. It exists as a standalone legal entity, which means the business, not the owners, holds responsibility for debts and obligations. That separation gives shareholders limited liability protection and creates a clear boundary between personal and corporate assets.
How a C Corp is structured
A C corp follows a formal hierarchy. Shareholders, as many as several thousand, own the company through stock. The structure places no cap on how many investors you can have, and it allows both U.S. and international individuals to hold shares. Shareholders elect a board of directors to guide the strategy, while officers—like the CEO or CFO—handle daily operations. To maintain this setup, corporations must follow strict guidelines, including bylaws, annual meetings, and detailed recordkeeping.
How taxes work for a C Corp
A C corp files its own federal tax return (Form 1120) and pays corporate income tax on the profits. When it distributes earnings as dividends, shareholders also report those on their personal returns, creating what many refer to as “double taxation.” However, a C corp can retain earnings to reinvest in the business, providing flexibility for growth.
What is an S corporation?
An S corporation, or S corp, is a recognized type of business in the United States that receives special tax treatment under Subchapter S of the Internal Revenue Code. The corporation pays owner-employees of S corps a reasonable salary, subject to payroll taxes, including Social Security, Medicare, and federal unemployment tax. The corporation pays these taxes.
Instead of paying corporate income tax directly, an S corp’s profits and losses pass through to the shareholders, who report them on their personal income tax returns. This pass-through setup allows owners to avoid the “double taxation” that applies to C corporations.
How an S Corp is structured
An S corp has the same basic framework as other corporations, with shareholders, directors, and officers. To qualify, however, it must follow IRS rules: no more than 100 shareholders, all of whom must be U.S. citizens or residents, and only one class of stock can be issued. The company must also be a domestic entity. Like C corps, S corps need to follow bylaws, hold annual meetings, and keep formal records.
How taxes work for an S Corp
An S corp files an informational return (Form 1120S), and shareholders report income, losses, deductions, and credits on their personal returns. This means the tax burden shifts to the individual level. This often works well for small corporations where owners want earnings to flow directly to them.
Example of an S Corporation
Picture a small tech startup with four U.S.-based founders and a handful of employees. They don’t plan to raise venture capital and want business income to land on their personal returns. They incorporate in their state, file FORM 2553 to elect S status, and operate as an S corp.
Many small corporations, including S corps like this startup, often leverage small business employee benefits programs to attract and retain skilled employees.
Some examples of small corporations you’ll often see are places like:
- A local marketing or design studio with a small roster of clients
- A boutique e-commerce brand run by its founders
- A medical, dental, or accounting practice owned by a few professionals
- A trade business, like plumbing or landscaping
Key differences between S corp and C corp
The main differences between an S corporation and a C corporation are in how they’re taxed, who can own shares, and how flexibly they raise money. While both exist as separate legal entities with liability protection, their IRS rules and ownership structure create distinct paths for business owners.
Tax treatment
How your business is taxed depends on its corporate structure.
- C corp: The company files Form 1120 to report income and pay corporate income tax. Shareholders then report dividends on their personal returns and pay tax on that income again.
- S corp: The IRS classifies this structure as a pass-through entity, which files Form 1120S. Profits and losses flow to owners’ personal returns instead of being taxed at the entity level.
Ownership and shareholder restrictions
Each structure has rules about who can own shares and how many shareholders are allowed.
- C corp: There’s no cap on owners and no residency or citizenship limits. Entities and foreign investors can own shares.
- S corp: To qualify as an S corp, businesses are capped at 100 shareholders. Owners must be U.S. citizens or residents. Most entities (corporations, partnerships, and many LLCs) can't be shareholders.
Stock structure
Corporate structure can impact stock flexibility.
- C corp: This structure can issue multiple classes of stock (including preferred), which supports complex investor rights.
- S corp: This is limited to one economic class of stock (voting can vary), which narrows financing options.
Ability to attract investors
The structure you choose can impact how easily you raise capital.
- C corp: This structure works best for outside capital. Unlimited shareholders and preferred stock align well with venture and public market expectations.
- S corp: Shareholder limits and single-class stock make fundraising harder.
Where LLCs fit in
Among the various types of organizational structures for businesses, an LLC combines liability protection with pass-through taxation like an S corp but offers more flexibility and fewer restrictions. Many small business owners start with an LLC before deciding whether to convert to S corp or C corp.
Some LLCs can choose their tax status by filing IRS Form 8832, allowing them to elect corporate tax treatment. This provides additional flexibility compared to the default pass-through status.
Pros and cons of S and C corporations
No structure is perfect—each comes with trade-offs that affect taxes, ownership, and long-term strategy. Weighing the pros and cons of S corp vs. C corp gives business owners a better view of which option fits with their goals today and in the future.
S corp pros and cons
S corps appeal to owners seeking tax efficiency, but this structure has structural constraints that limit scalability and investor appeal.
Pros:
- S corps use pass-through taxation, meaning the business itself doesn’t pay federal income tax.
- Owner-employees receive a reasonable salary subject to payroll taxes, but distributions beyond that aren’t subject to Social Security, Medicare, or FUTA taxes.
- S corps can reduce the total tax burden for closely held companies, depending on the owners’ situation and ability to leverage losses on their tax returns.
Cons:
- S corporations lack shareholder flexibility. They can only have 100 shareholders who must all be U.S. citizens or residents.
- The IRS allows only one economic class of stock to be issued.
- S corps are less attractive for institutional capital or IPO plans because of ownership limits and stock restrictions.
C corp pros and cons
C corps offer broader ownership and financing options but come with heavier compliance and tax obligations.
Pros:
- There’s no limit on shareholders. Entities and non-U.S. investors can own shares.
- C corps can issue multiple stock classes, including preferred, which align with venture financing.
- C corps can retain earnings inside the company to fund growth rather than distributing them immediately.
Cons:
- C corps are subject to corporate income tax, and shareholders pay tax again on dividends.
- There’s added complexity and cost from corporate-level tax filing and ongoing compliance.
When should you choose an S corp vs. a C corp?
Deciding between an S corp and a C corp depends on what you want your business to achieve.
Choose an S corp when you:
- Want pass-through taxation so profits and losses land on the owner's personal returns rather than a corporate return
- Run a small, closely held company with a limited number of U.S. owners, and you don’t plan to add foreign investors
- Don’t need preferred stock or complex investor rights
- Expect early-stage losses that owners can use on personal returns, subject to tax rules
Choose a C corp when you:
- Plan to raise venture capital or leave room for an IPO; C corps allow unlimited shareholders
- Need multiple stock classes, including preferred shares, to structure investor rights and future rounds
- Want the option to retain earnings in the company to fund growth
- Prefer the default corporate tax treatment and a structure investors recognize instantly
How to set up an S corp or C corp
The core steps to form either type of corporation are similar, but the tax election makes the difference. Here’s a simplified outline of the steps to form either structure.
Both S and C corporations start with the same foundation under state law:
- Choose a business name.
- File Articles of Incorporation (or Certificate of Incorporation) with the state.
- Appoint directors, adopt bylaws, and hold the initial board meeting.
- Issue stock to shareholders and record ownership.
- Stay compliant with annual reports, shareholder meetings, and recordkeeping.
Where they split is in how taxes are handled:
- S corp: File IRS Form 2553 (and sometimes a state election) to choose pass-through taxation.
- C corp: Do nothing; remain the default and file Form 1120 for corporate taxes.
Confidently expand your operations through Oyster
Now that you know what an S corp and C corp are, choosing the right one is the first step in running a successful business. And once you do that, Oyster can help build your team.
Our platform makes it simple to hire and manage people in over 180 countries without worrying about entity management and international compliance. With Oyster, you won’t have to juggle local labor laws, HR compliance, or risk missteps in new markets. We’ll give you the confidence to focus on scaling your business with the best talent—no matter where they’re located.
If expanding globally is part of your roadmap, Oyster’s ready to help you move fast and scale with confidence. Explore how Oyster ensures compliance and supports global expansion for fast-growing companies.
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About Oyster
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