S Corp vs C Corp: Taxes, Eligibility and Examples (2026)

Quick answer: A C corp pays a flat 21% federal corporate income tax, and shareholders pay tax again on dividends, so profits can be taxed twice. An S corp is a pass-through: profits flow to owners' personal returns and are taxed once. S corps face strict eligibility limits, including 100 shareholders, one class of stock and US owners only.

Choosing between an S corp vs C corp is one of the biggest tax decisions a growing business makes. Both are corporations under state law, with the same liability protection, boards and shares. The difference lies in how the IRS taxes them, who can own them and how easily they can raise money. This guide covers taxation, eligibility, a double tax worked example and the situations where each one wins. It is general information, not tax advice.

What is the difference between an S corp and a C corp?

When you incorporate in any state, the corporation starts life as a C corporation, named after Subchapter C of the Internal Revenue Code. If it meets the requirements and files Form 2553, it becomes an S corporation under Subchapter S. An LLC can also elect S corp taxation, which is why you see comparisons like S corp vs LLC.

• C corp: separate taxpayer. Files Form 1120, pays corporate income tax, and shareholders pay tax on dividends.
• S corp: pass-through. Files Form 1120-S as an information return, issues Schedule K-1s, and shareholders report their share of profit whether or not it is distributed.

S corp vs C corp comparison table

Feature	S corporation	C corporation
Federal tax on profits	None at entity level (generally); owners pay at individual rates	21% flat corporate rate
Tax on distributions	Generally tax-free up to basis	Dividends taxed at 0%, 15% or 20%, plus 3.8% NIIT for some
Federal return	Form 1120-S plus K-1s	Form 1120
Shareholder limit	100 (family members can count as one)	Unlimited
Eligible owners	US citizens and residents, certain trusts, estates, exempt orgs	Anyone, including foreign persons, corporations, funds
Classes of stock	One (voting differences allowed)	Multiple, including preferred
Losses	Pass through to owners, subject to basis and at-risk limits	Stay in the company as net operating losses
Owner pay	Reasonable salary required, rest as distributions	Salary, bonuses, dividends
QBI deduction	Owners may qualify for 20% deduction	Not available
Section 1202 QSBS exclusion	Not available	Available if requirements met
Best for	Owner-operated profitable businesses	Venture-backed startups, reinvesting companies

How is a C corp taxed?

Since the Tax Cuts and Jobs Act took effect in 2018, C corps pay a flat 21% federal income tax on taxable income, with no graduated brackets. The corporation deducts salaries, rent and other business expenses but cannot deduct dividends. When it distributes after-tax profit, shareholders pay tax on the dividends: qualified dividends are taxed at 0%, 15% or 20%, and high earners may add the 3.8% net investment income tax.

This is the "double tax". It only bites when profits are paid out as dividends. Profits kept in the company to fund growth are taxed once at 21%, which is lower than the top individual rate of 37%. Owners who work in a C corp can also take a deductible salary, which is taxed once at personal rates plus payroll taxes.

How is an S corp taxed?

An S corp generally pays no federal income tax. Its income, deductions and credits pass through to shareholders on Schedule K-1 in proportion to ownership, and they pay tax at individual rates whether or not the cash is distributed. Owner-employees must take a reasonable salary through payroll, which carries Social Security and Medicare taxes. Profit above that salary passes through without self-employment tax, which is the main attraction compared with a sole proprietorship or partnership.

S corp owners may also qualify for the 20% qualified business income deduction on their pass-through profit (not on their salary), subject to income thresholds and limits for specified service businesses. The deduction was made permanent by the 2025 tax law known as the One Big Beautiful Bill Act.

Who is eligible for S corp status?

To elect and keep S status, the corporation must:

1. Be a domestic corporation (or an LLC that elects corporate treatment).
2. Have no more than 100 shareholders, with family members able to elect to count as one.
3. Have only eligible shareholders: individuals who are US citizens or residents, certain trusts, estates and some tax-exempt organizations. No partnerships, corporations or nonresident aliens.
4. Have only one class of stock. Differences in voting rights are allowed, but every share must have identical rights to distributions and liquidation proceeds.
5. Not be an ineligible corporation, such as certain banks and insurance companies.

Form 2553 is generally due no more than two months and 15 days after the start of the tax year the election is to take effect (March 15 for a calendar-year company), though the IRS provides relief for late elections in many cases. All shareholders must sign consent. See the IRS S corporations page for the official rules.

Worked example: double tax vs pass-through

Consider one owner whose company earns $200,000 of profit before paying the owner, in 2026. To keep the math readable, assume an illustrative 24% average federal income tax rate on the owner's taxable income and ignore state taxes. Real rates depend on filing status, other income and deductions.

C corp, all profit paid as dividends

Step	Amount
Corporate profit	$200,000
Corporate tax at 21%	$42,000
Dividend paid to owner	$158,000
Dividend tax at 15% (qualified)	$23,700
Total federal tax	$65,700
Owner keeps	$134,300

S corp, $90,000 salary plus pass-through profit

Step	Amount
Owner salary	$90,000
Employer share of FICA (7.65%), deductible	$6,885
Pass-through profit ($200,000 - $90,000 - $6,885)	$103,115
QBI deduction (20% of $103,115, if eligible)	-$20,623
Taxable income ($90,000 + $103,115 - $20,623)	$172,492
Income tax at illustrative 24%	$41,398
Total FICA (employer + employee, 15.3%)	$13,770
Total federal tax	$55,168

In this illustration the S corp saves roughly $10,500 a year when the owner takes all the profit out. But if the C corp instead kept the $158,000 in the business to fund expansion, its tax this year would be only $42,000. That is why fast-growing companies that reinvest everything, or plan an exit that could qualify for the Section 1202 exclusion, often stay C corps. Under the 2025 law, for qualifying stock issued after July 4, 2025, the exclusion phases in after three years and reaches 100% after five, subject to dollar caps, so confirm current limits with a tax adviser.

When does a C corp make more sense?

• You plan to raise venture capital or issue preferred stock.
• Owners include foreign persons, other companies or investment funds.
• The business will retain most profits for growth rather than distribute them.
• You hope to sell the company and may qualify for the Section 1202 qualified small business stock exclusion.
• You want more than 100 shareholders, such as a broad employee stock plan.

When does an S corp make more sense?

• You run a profitable owner-operated business and take most profits out.
• Your profit is comfortably above a reasonable salary, so the payroll tax savings outweigh extra costs.
• Early-year losses could offset owners' other income (subject to basis, at-risk and passive activity rules).
• All owners are US individuals and you do not need multiple share classes.

Read how to pay yourself as a business owner for salary and distribution mechanics, and how to run payroll yourself if you will process the owner's salary in-house.

Steps to choose and set up your corporate tax status

1. Estimate profit. Project net income for the next two to three years.
2. Set a reasonable salary. Use market pay data for your role and hours.
3. Model both options. Run the numbers with your actual tax bracket and state taxes, including payroll and bookkeeping costs.
4. Check ownership plans. Any foreign owner, investor fund or preferred stock rules out an S corp.
5. Form the entity. Incorporate or form an LLC, then get an EIN.
6. File Form 2553 on time if you choose S status, with every shareholder's consent.
7. Set up payroll for owner-employees, quarterly Form 941 filings and year-end W-2s.
8. Review annually. The right answer can change as profits, owners and tax laws change.

What extra costs and paperwork come with each?

The tax rate is only part of the comparison. Each status brings its own compliance work:

Obligation	S corp	C corp
Federal income tax return	Form 1120-S, due March 15 for calendar-year companies	Form 1120, due April 15 for calendar-year companies
Owner tax forms	Schedule K-1 to each shareholder	Form 1099-DIV for dividends
Payroll for owner-employees	Required (reasonable salary)	Required if owners take a salary
Estimated taxes	Paid by shareholders personally	Paid by the corporation quarterly
Basis tracking	Shareholders must track stock and debt basis	Simpler, basis matters mainly on sale
State filings	Annual report; some states add entity taxes	Annual report and state corporate income or franchise tax
Corporate formalities	Bylaws, board and shareholder minutes	Same

Payroll is the biggest new cost for many S corp owners: a payroll service, quarterly Form 941 filings, state withholding and unemployment accounts and a year-end W-2. Accountants also typically charge more to prepare Form 1120-S and K-1s than a sole proprietor's Schedule C. A common rule of thumb among advisers is that S corp status starts to pay off once profit is well above what a reasonable salary for your role would be, but the break-even point depends on your state, your salary level and your accountant's fees, so model it with real numbers.

How are losses treated?

Early-stage losses are another difference. S corp losses pass through and can offset a shareholder's other income, limited to the shareholder's stock and debt basis and subject to at-risk and passive activity rules. C corp losses stay inside the company as net operating losses that can be carried forward to offset future corporate profits (generally limited to 80% of taxable income in a given year), but never reach the owners' personal returns. A founder who expects a few years of losses before profitability, and has other income, may benefit from S status in those years.

Common mistakes with S corps and C corps

• Electing S status too early. If profit is low, payroll costs and extra filings can exceed the tax savings.
• Paying no salary. S corp owners who take only distributions risk having them recharacterized as wages, with back payroll taxes and penalties.
• Disproportionate distributions. Paying one shareholder more than their ownership share can be treated as a second class of stock, threatening the election.
• Adding an ineligible shareholder. Selling shares to an LLC, a corporation or a nonresident alien terminates S status.
• Ignoring state rules. Some states tax S corps at the entity level or do not recognize the election.
• Mixing personal and corporate money. Both entity types need separate accounts, minutes and records to keep liability protection.

How invoicing works for either corporation

The tax election does not change how you bill customers. Invoices should show the corporation's legal name (with "Inc.", "Corp." or "LLC"), address, invoice number, dates, line items, any sales tax and payment terms. Clear invoices make revenue easy to match to bank deposits, which matters for both Form 1120 and Form 1120-S. You can create them in our free invoice generator and number them consistently with the invoice number generator.

S corp vs C corp: final take

For most profitable owner-run small businesses, the S corp vs C corp comparison favors the S corp because profits are taxed once and owners can blend salary and distributions. The C corp wins for companies that reinvest heavily, raise outside capital or have ineligible owners. Model both with your accountant, then keep your billing tidy with our free invoice generator: no sign-up, and the PDF is built right in your browser.