S-Corp vs C-Corp
Last updated July 2026
S-Corp
Pass-through taxation for profitable small businesses
Advantages
- Pass-through taxation avoids C-Corp double tax
- Saves self-employment tax on income above reasonable salary
- Same liability protection as C-Corp
- Familiar structure with clear tax planning benefits
- Best fit for profitable owner-operated businesses
Drawbacks
- Capped at 100 shareholders, all must be U.S. persons or trusts
- Only one class of stock allowed
- VCs won't invest in S-Corps, must convert to C-Corp first
C-Corp
The default structure for institutional investment
Advantages
- Standard structure for VCs and institutional investors
- Unlimited shareholders including foreign investors and other entities
- Multiple stock classes (common, preferred, convertible)
- Employee stock option plans work cleanly
- Qualified Small Business Stock (QSBS) offers major capital gains break
Drawbacks
- Double taxation: corporate profits then dividends
- Heavier compliance: board, bylaws, minutes, resolutions
- No self-employment tax savings via distribution strategy
S-Corp and C-Corp are both corporations, but their tax treatment couldn't be more different. S-Corps pass profits through to shareholders' personal returns, avoiding double taxation. C-Corps are taxed at the corporate level and again when profits are distributed. Your fundraising plan and shareholder count decide it.
Feature Comparison
| Feature | S-Corp | C-Corp |
|---|---|---|
| Setup Cost | $50-$500 state filing + Form 2553 election | $50-$500 state filing; Delaware often preferred |
| Tax Treatment | Pass-through; salary + distribution split | Double taxation, corporate then dividend |
| Shareholder Limit | 100 max, U.S. persons only | Unlimited |
| Stock Classes | One class of stock only | Multiple classes allowed |
| Raising Capital | Very limited, can't take VC money | Excellent, preferred by VCs |
| Self-Employment Tax | Only on reasonable salary portion | N/A, W-2 employee treatment |
| Ongoing Complexity | Corporate formalities + payroll requirement | Board, bylaws, minutes, resolutions |
| Best Use Case | Profitable owner-operated businesses | Venture-backed startups |
Too Close to Call
Match the entity to your fundraising plan. S-Corp for profitable owner-operated businesses; C-Corp if you're raising VC.
S-Corp taxation delivers real savings for owner-operated businesses making six figures or more, thanks to the salary-plus-distribution split. C-Corp is the mandatory choice if you're raising institutional capital, and its double taxation is offset by QSBS benefits at exit. These are different tools for different journeys, picking correctly matters more than picking the popular one.