In a previous post, which was a simple infographic, I presented the differences between a multi-member LLC and a Partnership. Before that, we talked about the sole proprietorship vs the single-member LLC. In this post we’ll cover the next two most common business structures, the S Corporation and the C Corporation.
Both benefit from a corporate veil, a legal protection concept separating business assets from personal assets. Shareholders, Employees, Directors, and Officers’ personal assets cannot be taken in the event of a lawsuit against the company, so the only assets at risk in a legal dispute involving the corporation is the corporation’s own business assets.
C Corps and S Corps also benefit from having a structure that can persist beyond the lifespan of the shareholders, unlike Sole Props or Partnerships.
S Corps and C Corps take more paperwork to assemble than a Sole Proprietorship, a Partnership, or an LLC. We’ll discuss the difference between these Corporations and why a person might choose them for their business structure.
What is a C Corp?
A C Corporation is in fact what most of us think of when we imagine a corporation. Pretty much every company whose stock you can buy on the open market are C Corporations. C Corporations are amazing because the person who controls a C Corporation can increase the number of shareholders in their corporation and, if they’re careful, not relinquish much control of how the corporation is managed. An example of this is Mark Zuckerberg, who went public with Facebook but still is by and large the commander in chief of what is now Meta. A C Corporation can sell these shares for profit by going public, either to raise money for expanded operations or as a fancy form of severance payment for retiring early from managing the business. Or, as is Zuckerberg’s case, he not only benefits from the public sale, he also benefits from the money his company continues to make.
The downsides are taxes. C Corporations suffer from double taxation. Despite a lower maximum personal tax rate, when combined with the corporate tax rate, C Corps can be cost prohibitive for many people. The corporation is taxed on its profits, and then when a shareholder receives dividend income from that company, the dividend income is taxed on their personal income tax return. Shareholders also cannot write off business losses on personal income statements, even if most of their income comes from the business they own, and it fluctuates depending on the performance of that corporation.
Another downside is paperwork. There are more reports, which have a greater rigidity and time to maintain than an S Corp or simpler business structure. Compound this further if the company is a publicly traded firm, in which case you’d also need to prepare documents to comply with the Securities and Exchange Commission (SEC). Included in this is quarterly taxes, which are required for C Corporations.
We mentioned equity (selling shares) before. C Corporations can sell virtually unlimited numbers of shares. There are no limits to the number of allowed shareholders. You can also release different kinds of shares, like common stock or preferred stock. These shareholders can be people from any country of origin or corporate statuses. For example, if you’re in California, and you’ve got investors in South Korea, you can sell them shares and get the money you need to expand fast.
What is an S-Corp, and How is it Different?
An S-Corp is a natural next step for many companies that start out as partnerships, sole proprietorships, and especially LLCs. Sole proprietorships and Partnerships would need to file Articles of Incorporation plus IRS form 2553: Election by a Small Business Corporation. An LLC has already filed Articles, so they would simply need IRS form 2553, which they can file on their upcoming taxes.
When it comes to raising equity from investors, S-Corps are limited. That might not be a bad thing, depending on your purposes. First off, you can only release one class of stock, not multiple kinds. Second, investors can only be U.S. Citizens, permanent residents, and certain domestic trusts, estates, and tax-exempt organizations can also hold stock. This rules out C-Corps and Partnerships, which today represent a large party of monied investors. Finally, you can only have 100 shareholders. If you’re starting an organization with a small community like a church, a professional organization, or a family business, this can be a good structure to raise money while keeping the shareholder lists small and localized. If family investors are citizens abroad, they are advised to maintain permanent residencies in the United States, or consult a family wealth attorney to discuss the legal use of trusts and estates, though that is beyond my paygrade at the moment.
Despite the limits of equity financing, S Corps gain the advantage in taxation. In some cases, owners can deduct business losses on their personal taxes. Plus, S Corps avoid the double-taxation of C-Corps by only being taxed on personal income from the corporation. S-Corps only need to file taxes annually, instead of quarterly (March 15 of each year). Despite the higher cost of maintaining an S-Corp compared to an LLC, many LLCs choose to take on this cost because it lowers their taxes. A CPA mentor of mine advises self-employed people (like bookkeepers) to file as an S-Corp once their income passes $30,000 a year. This can lower their tax rate by 8-10%, especially in states that have franchise taxes. While my lovely home state of Alaska has no franchise tax, it is a personal goal to explore a possible S-Corp filing in 2026.
The only downside from a tax perspective is S-Corps get more IRS scrutiny. This is because in an S-Corp, there are two ways for an owner to get paid, and you can use both. The first is through dividends. The second is through a salary. Think of it this way: an owner of an S-Corp is like a CEO of a public corporation who gets dividend-paying stock. The CEO gets dividend payments and a salary. Salaries and dividends are taxed differently, and playing around with those numbers too much can start to look like tax evasion. I recommend talking to a CPA if you are thinking of forming an S-Corp to discuss the legal tax strategies of dividends and salary payouts.
Will you Form a Corporation?
If so, which one will you choose?
To learn more about S and C-Corps, I recommend these articles from Forbes and Thomson Reuters.
To have me assess your books and consult with you about reducing the time you spend bookkeeping, saving you money, and giving you the actionable financial information you need to grow your business, book a call with me. It costs you nothing, which can’t be said about filing an S or C-Corp!
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