The difference between C-Corporation and S-Corporation taxation can mean tens of thousands of dollars in annual tax savings—or cost you the same amount if you choose wrong. This isn’t a theoretical exercise. Every year, business owners leave money on the table because they picked the wrong entity structure or stayed in one that no longer fits their situation.
Both C-Corps and S-Corps are corporations under state law. The difference is purely a tax election. And that tax election changes everything: how much you pay, when you pay it, and what planning opportunities you have.
This guide breaks down the real differences between C-Corp and S-Corp taxation—with actual numbers, not vague generalities—so you can make an informed decision for your business.
Key Takeaways
- C-Corps pay a flat 21% federal tax rate on corporate profits, then shareholders pay tax again on dividends (double taxation)
- S-Corps pass income through to owners at individual rates (10-37%) with no corporate-level tax
- S-Corps qualify for the QBI deduction (up to 20% off qualified business income); C-Corps do not
- C-Corps are required for QSBS benefits (up to $15M tax-free gains under OBBBA 2025)
- S-Corps have restrictions: 100 shareholders max, US individuals/trusts only, one stock class
- Most small businesses benefit from S-Corp taxation—but C-Corp wins for VC-backed startups and QSBS planning
- Converting between structures has tax consequences—plan before you switch
Table of Contents
The Fundamental Difference: How Each Structure Is Taxed
Understanding C-Corp vs S-Corp taxation starts with one core concept: where the tax is paid.
C-Corporation: Separate Tax Entity
A C-Corporation is a completely separate taxpayer from its owners. The corporation:
- Files its own tax return (Form 1120)
- Pays its own federal income tax at a flat 21% rate
- Distributes remaining profits as dividends
- Shareholders then pay tax on those dividends at 0%, 15%, or 20%
This creates double taxation: profits are taxed once at the corporate level, then again when distributed to shareholders.
S-Corporation: Pass-Through Entity
An S-Corporation is a pass-through entity. The corporation:
- Files an informational return (Form 1120S)
- Pays no federal income tax at the corporate level
- Passes all income, deductions, and credits through to shareholders via Schedule K-1
- Shareholders report their share on personal returns and pay at individual rates
There’s only one level of tax—at the shareholder level.
This fundamental difference drives every other comparison between the two structures.
Tax Rate Comparison: The Real Numbers
Let’s get specific about what each structure actually costs in taxes.
C-Corporation Tax Rates
Federal corporate tax: 21% flat rate
This rate applies to all taxable income regardless of amount. A C-Corp with $100,000 in profit and one with $10 million in profit both pay 21% at the federal level.
State corporate taxes vary widely:
- 0%: Nevada, Wyoming, South Dakota, Washington (no corporate income tax)
- 4-6%: Most states
- 8-12%: California, New Jersey, Pennsylvania, Iowa
Combined federal + state: Typically 21-30% depending on state
Dividend tax on distributions:
- 0% for taxpayers in the 10-12% brackets
- 15% for most taxpayers (up to $492,300 single / $553,850 married in 2024)
- 20% for high earners above those thresholds
- Plus 3.8% Net Investment Income Tax for high earners
S-Corporation Tax Rates
No corporate-level federal tax
S-Corp income passes through to shareholders and is taxed at individual rates:
- 10% on income up to $11,600 (single) / $23,200 (married)
- 12% on income $11,601-$47,150 (single) / $23,201-$94,300 (married)
- 22% on income $47,151-$100,525 (single) / $94,301-$201,050 (married)
- 24% on income $100,526-$191,950 (single) / $201,051-$383,900 (married)
- 32% on income $191,951-$243,725 (single) / $383,901-$487,450 (married)
- 35% on income $243,726-$609,350 (single) / $487,451-$731,200 (married)
- 37% on income over $609,350 (single) / $731,200 (married)
But wait—there’s more: S-Corp owners may qualify for the Qualified Business Income (QBI) deduction, which can reduce the effective rate by up to 20%.
State taxes: S-Corp income flows through to your personal state return. Some states (like California) impose an additional entity-level tax on S-Corps.
Double Taxation Explained: The C-Corp Cost
Double taxation is the primary reason most small businesses avoid C-Corp status. Here’s exactly how it works:
Double Taxation Calculation Example
Scenario: C-Corp earns $200,000 profit, distributes all after-tax profits as dividends
| Step | Calculation | Amount |
|---|---|---|
| Corporate profit | $200,000 | |
| Federal corporate tax (21%) | $200,000 × 21% | -$42,000 |
| Net after corporate tax | $158,000 | |
| Dividend distributed | $158,000 | |
| Shareholder dividend tax (15%) | $158,000 × 15% | -$23,700 |
| Net to shareholder | $134,300 | |
| Total tax paid | $42,000 + $23,700 | $65,700 |
| Combined effective rate | $65,700 ÷ $200,000 | 32.85% |
For high earners in the 20% dividend bracket plus the 3.8% Net Investment Income Tax, the combined rate reaches approximately 39.8%.
When Double Taxation Doesn’t Matter
Double taxation only applies to distributed profits. If your C-Corp retains earnings and reinvests them in the business, there’s no second tax—yet.
This is why C-Corps can work for:
- Growth companies reinvesting all profits
- Startups building toward a QSBS-eligible exit
- Businesses with patient capital that don’t need current distributions
For more strategies to minimize double taxation, see our guide on C-Corp double taxation strategies.
S-Corp Advantages: Why Most Small Businesses Choose Pass-Through
For the typical small business owner who needs regular distributions from their company, S-Corp taxation usually wins. Here’s why:
1. Single Level of Tax
The most obvious advantage: no double taxation. S-Corp profits are taxed once at the shareholder level.
Same $200,000 scenario as S-Corp:
| Step | Calculation | Amount |
|---|---|---|
| S-Corp profit passed through | $200,000 | |
| Less: QBI deduction (20%) | $200,000 × 20% | -$40,000 |
| Taxable income | $160,000 | |
| Federal tax (24% bracket example) | Graduated rates | ~$30,000 |
| Net to shareholder | ~$170,000 | |
| Effective rate | ~15% |
That’s a $35,000+ difference compared to the C-Corp scenario above.
2. QBI Deduction (Section 199A)
The Qualified Business Income deduction allows S-Corp shareholders to deduct up to 20% of qualified business income from their taxable income.
Key QBI rules:
- Available for pass-through entities (S-Corps, partnerships, sole props)
- Not available to C-Corps
- Subject to limitations for high earners and specified service businesses
- Phases out starting at $182,100 (single) / $364,200 (married) in 2024
For a business owner in the 32% bracket, the QBI deduction effectively reduces their rate to about 25.6% on qualified income.
3. Self-Employment Tax Savings
S-Corps provide a legitimate way to reduce self-employment taxes through the reasonable salary strategy.
How it works:
- S-Corp owner-employees must pay themselves a “reasonable salary”
- Salary is subject to payroll taxes (Social Security + Medicare = 15.3% combined)
- Remaining profits distributed as dividends are not subject to self-employment tax
- Potential savings: 15.3% on the amount above reasonable salary
Example: Business with $200,000 profit
- Reasonable salary: $80,000 → Subject to payroll taxes
- Distribution: $120,000 → No self-employment tax
- Savings: $120,000 × 15.3% = $18,360 in avoided SE tax
This strategy must be executed carefully. The IRS scrutinizes unreasonably low salaries. See our guide on determining S-Corp reasonable compensation.
4. Loss Pass-Through
S-Corp losses pass through to shareholders and can offset other income on their personal returns (subject to basis, at-risk, and passive activity limitations).
C-Corp losses stay trapped in the corporation. They can only offset future C-Corp profits—they can’t reduce your personal tax bill.
C-Corp Advantages: When Corporate Structure Wins
Despite double taxation, C-Corps are the right choice in specific situations:
1. Venture Capital and Outside Investment
VCs and institutional investors strongly prefer—and often require—C-Corp structure because:
- Clean equity structure for multiple funding rounds with different share classes
- No pass-through complications: Investors don’t want K-1s showing income they didn’t receive in cash
- Standardized governance: Delaware C-Corp is the default for institutional investment
- QSBS benefits: Only available for C-Corp stock (see below)
- Easier exit path: Acquirers and IPO underwriters prefer C-Corp structure
If you’re raising institutional capital, you’ll almost certainly be a Delaware C-Corp.
2. QSBS Tax Exclusion (Section 1202)
Qualified Small Business Stock (QSBS) is one of the most valuable tax benefits available—and it’s only available for C-Corps.
What QSBS offers:
- Exclude up to 100% of capital gains on sale of qualifying C-Corp stock
- Maximum exclusion: $15 million or 10× your basis (whichever is greater)
- Potentially $0 federal tax on a successful exit
OBBBA 2025 Enhanced QSBS Benefits (for stock issued after July 4, 2025):
- Exclusion cap increased from $10M to $15M (indexed for inflation after 2026)
- Gross asset threshold increased from $50M to $75M
- New tiered holding periods:
- 50% exclusion at 3+ years
- 75% exclusion at 4+ years
- 100% exclusion at 5+ years
For founders expecting a significant exit, QSBS alone can justify C-Corp status. A founder selling $15 million in QSBS stock could save over $3.5 million in federal taxes compared to ordinary capital gains treatment.
3. Reinvestment Strategy
If you’re reinvesting all profits into growth with no plans to distribute cash:
- 21% corporate rate may be lower than your personal rate
- No double taxation if no dividends are paid
- Build value for eventual sale (potentially QSBS-eligible)
This strategy works for growth-stage companies that don’t need to distribute cash to owners.
4. Fringe Benefit Advantages
C-Corps can deduct certain fringe benefits that aren’t fully deductible for S-Corps:
| Benefit | C-Corp Treatment | S-Corp Treatment (>2% shareholders) |
|---|---|---|
| Health insurance | Fully deductible, tax-free to employee | Deductible, but taxable to shareholder |
| Group term life (≤$50K) | Tax-free to employee | Taxable to shareholder |
| Disability insurance | Can be tax-free | Generally taxable |
| Medical reimbursement plans | More flexibility | Limited for shareholders |
For owner-employees in high tax brackets with significant benefit needs, this can provide meaningful savings.
5. Foreign Shareholders
S-Corps cannot have foreign shareholders. Only US citizens and resident aliens (plus certain trusts and estates) can own S-Corp stock.
If you have international investors or non-resident alien owners, C-Corp may be your only corporate option.
6. Unlimited Shareholders and Multiple Stock Classes
S-Corp limitations:
- Maximum 100 shareholders
- Only US individuals, certain trusts, and estates can be shareholders
- Only one class of stock allowed (though voting rights can differ)
C-Corp flexibility:
- Unlimited shareholders
- Any person or entity can be a shareholder
- Multiple stock classes (common, preferred, etc.)
- Complex equity arrangements for investors and employees
Complete Comparison Table: C-Corp vs S-Corp
| Factor | C-Corporation | S-Corporation |
|---|---|---|
| Federal tax rate | 21% flat + dividend tax | Pass-through at individual rates (10-37%) |
| Double taxation | Yes, on distributed profits | No |
| QBI deduction | Not available | Up to 20% deduction |
| Self-employment tax | N/A (owners are employees) | Avoided on distributions above salary |
| QSBS eligible | Yes | No |
| Maximum shareholders | Unlimited | 100 |
| Shareholder types | Any person or entity | US individuals/certain trusts only |
| Foreign shareholders | Allowed | Not allowed |
| Stock classes | Multiple allowed | One class only |
| Fiscal year | Any year-end | Generally calendar year |
| Loss treatment | Stays in corporation | Passes through to shareholders |
| VC/institutional investors | Strongly preferred | Difficult/rare |
| Tax return | Form 1120 | Form 1120S |
Making the Decision: When to Choose Each Structure
Choose S-Corp When:
- You need regular distributions from the business
- You want the QBI deduction (up to 20% savings)
- You want to minimize self-employment tax
- Your shareholders are all US individuals
- You have 100 or fewer shareholders
- You don’t need multiple stock classes
- You’re not planning to raise institutional capital
Choose C-Corp When:
- You’re raising venture capital or institutional funding
- QSBS benefits are a significant part of your exit strategy
- You’re reinvesting all profits with no near-term distribution needs
- You have or will have foreign shareholders
- You need multiple stock classes for investors or equity compensation
- You’re planning an IPO or acquisition where C-Corp structure is expected
- Fringe benefit deductions are significant for owner-employees
The Typical Recommendation
For most small businesses with active owners who need distributions: S-Corp taxation usually wins.
The combination of single-level taxation, QBI deduction, and self-employment tax savings typically outweighs any C-Corp advantages for businesses under $5M in revenue where owners need to take money out of the business.
But “most” doesn’t mean “all.” Your specific situation matters.
Converting Between C-Corp and S-Corp
What if you’re in the wrong structure? Conversion is possible, but it has tax consequences.
S-Corp to C-Corp Conversion
Process: Revoke the S election by filing a statement with the IRS
Tax implications:
- Generally straightforward with minimal immediate tax consequences
- QSBS holding period clock starts fresh with the conversion
- Consider timing around fiscal year-end
When it makes sense:
- Before a VC funding round
- To start the QSBS clock for a planned exit
- When foreign shareholders are added
C-Corp to S-Corp Conversion
Process: File Form 2553 (S Corporation Election)
Tax implications are more complex:
Built-in Gains (BIG) Tax: If the C-Corp has appreciated assets at conversion, the S-Corp may owe a 21% tax on gains recognized within 5 years of conversion (on the built-in gain portion).
Earnings & Profits (E&P): Accumulated E&P from C-Corp years carries forward. Distributions from the E&P layer are taxed as dividends, not tax-free return of basis.
AAA Tracking: The Accumulated Adjustments Account starts at zero upon conversion and must be tracked separately from E&P.
When it makes sense:
- When double taxation is costing more than BIG tax exposure
- Early in the company’s life (less E&P, fewer appreciated assets)
- During periods of low asset values
For detailed guidance on conversion planning, see our article on C-Corp to S-Corp conversion tax implications.
Real-World Scenarios
Scenario 1: Professional Services Firm, $300K Profit, Owner Needs $200K
Best choice: S-Corp
- Owner takes $120K reasonable salary (subject to payroll tax)
- $180K passes through as S-Corp income
- QBI deduction saves ~$10,800 (20% × $180K × 30% bracket)
- Self-employment tax saved: ~$9,200 (vs. sole prop)
- Total annual savings vs. C-Corp: ~$25,000+
Scenario 2: Tech Startup, Raising Series A, Reinvesting All Profits
Best choice: C-Corp
- VCs require C-Corp structure
- QSBS clock starts at incorporation
- No distributions = no double taxation currently
- Potential $15M+ tax-free exit under QSBS
- Potential future savings: $3.5M+ in capital gains tax
Scenario 3: E-Commerce Business, $150K Profit, Two US Partners
Best choice: S-Corp (or remain as partnership)
- Pass-through taxation avoids double taxation
- QBI deduction applies
- Partners can take distributions as needed
- No need for C-Corp complexity
- Simpler, lower tax, appropriate for scale
Scenario 4: Manufacturing Company, $2M Profit, 5 Partners Including Foreign Investor
Best choice: C-Corp
- Foreign investor disqualifies S-Corp election
- 21% flat rate on retained earnings
- Can structure distributions strategically
- May qualify for QSBS on eventual sale
- Only viable corporate structure given ownership
Frequently Asked Questions
Is C-Corp or S-Corp better for taxes?
For most small businesses where owners need regular distributions, S-Corp typically results in lower taxes due to pass-through taxation, the QBI deduction, and self-employment tax savings. C-Corp is better when raising VC funding, planning for QSBS benefits, or when S-Corp eligibility requirements can’t be met.
What is double taxation in a C-Corp?
Double taxation occurs when C-Corp profits are taxed first at the corporate level (21%) and then again when distributed as dividends to shareholders (0-23.8%). The combined effective rate on distributed profits can reach 40%.
Can I switch from C-Corp to S-Corp?
Yes, by filing Form 2553 with the IRS. However, the conversion triggers potential built-in gains tax (21% on appreciated assets sold within 5 years) and creates E&P tracking requirements. Earlier conversion is generally easier.
Why do startups choose C-Corp?
Startups choose C-Corp primarily for venture capital compatibility and QSBS benefits. VCs require C-Corp structure for clean equity rounds, and QSBS can exclude up to $15M in capital gains from tax on a successful exit—a benefit only available to C-Corps.
Do C-Corps get the QBI deduction?
No. The Section 199A Qualified Business Income deduction is only available to pass-through entities (S-Corps, partnerships, sole proprietorships). This is a significant disadvantage for C-Corps with active owners.
Can an S-Corp have foreign shareholders?
No. S-Corps can only have shareholders who are US citizens, resident aliens, or certain domestic trusts and estates. A single foreign shareholder terminates the S election.
Which is better for self-employment tax?
S-Corp, when structured properly. S-Corp shareholders who are also employees pay payroll taxes only on their reasonable salary, not on distributions. C-Corp owner-employees pay payroll taxes on all wages but don’t face self-employment tax issues since they’re employees by definition.
What’s the QSBS benefit for C-Corps?
Qualified Small Business Stock (Section 1202) allows shareholders to exclude up to 100% of capital gains on C-Corp stock held for 5+ years (or 50-75% for shorter holding periods under OBBBA 2025). The maximum exclusion is $15M or 10× basis. This benefit is only available for C-Corp stock.
The Bottom Line
C-Corp vs S-Corp taxation isn’t about which structure is “better”—it’s about which structure is right for your situation.
S-Corp wins when you need distributions, want the QBI deduction, and don’t need the flexibility or investor compatibility of C-Corp structure. For the majority of small business owners, this is the right choice.
C-Corp wins when you’re raising institutional capital, planning for QSBS benefits, reinvesting all profits, or have ownership structures that disqualify S-Corp status.
The wrong choice can cost you tens of thousands annually. The right choice—made with full understanding of your situation—can save you the same amount.
Entity selection and tax structure decisions deserve more than a quick Google search. If you’re evaluating C-Corp vs S-Corp for your business, comparing scenarios with your actual numbers, or considering a conversion, schedule a consultation with our team to model the tax impact for your specific situation.