S-Corp vs C-Corp

An S-Corporation is a business that has elected special tax status under Subchapter S of the Internal Revenue Code. The defining feature is pass-through taxation — the business itself doesn't pay federal income tax. Instead, profits and losses flow directly to shareholders who report them on personal tax returns.

S-Corps also allow owners to split income between a salary and distributions, reducing the amount subject to self-employment tax. This is one of the most popular tax strategies for creators, freelancers, and small business owners who have consistent income above $40,000–$50,000 per year.

• Up to 100 shareholders (US citizens or permanent residents only)
• One class of stock
• Pass-through taxation — no corporate-level federal income tax
• Self-employment tax savings on distributions above reasonable salary

A C-Corporation is the default corporate structure — what most people mean when they say "corporation." Unlike an S-Corp, a C-Corp pays corporate income tax on its profits. If the company then distributes those profits to shareholders as dividends, shareholders also pay tax on those dividends. This is the infamous double taxation problem.

Despite the double taxation drawback, C-Corps are the preferred structure for companies seeking venture capital or planning to go public. They can have unlimited shareholders, multiple classes of stock, and foreign investors — flexibility that S-Corps can't offer.

• Unlimited shareholders (any type — individuals, corporations, foreign nationals)
• Multiple classes of stock (common, preferred, etc.)
• Corporate-level tax at 21% federal rate + dividend tax for shareholders
• Standard structure for VC-backed startups and public companies

Tax treatment is the biggest practical difference between S-Corps and C-Corps for most small business owners.

S-Corp taxation: Business profits pass through to shareholders' personal tax returns. The business files Form 1120-S but pays no federal income tax at the entity level. Shareholders report their share of income and pay tax at their personal rate. Owner-employees also pay payroll taxes only on their salary — not on distributions.

C-Corp taxation: The corporation pays a flat 21% federal corporate income tax on profits. If the company pays dividends to shareholders, those dividends are taxed again at the shareholder's capital gains rate (0%, 15%, or 20% depending on income). Total tax burden is often 30–40% combined.

For a small business earning $150,000 in profit, the difference can be substantial. An S-Corp owner paying themselves an $80,000 salary might pay self-employment taxes only on that salary, while taking $70,000 as a distribution at a lower effective rate. A C-Corp would pay 21% corporate tax first, then the owner pays again on any distributions.

S-Corp is the better choice when:

• Your net business income is $40,000–$500,000+ per year
• You're a creator, freelancer, consultant, or small service business
• You want to reduce self-employment taxes legally
• You don't need outside investors or multiple share classes
• All shareholders are US citizens or permanent residents

For the vast majority of solo operators and small business owners, S-Corp status (applied to an LLC) is the most tax-efficient structure available once income reaches the threshold where savings outweigh compliance costs. You can explore our detailed S-Corp vs LLC comparison to see how pass-through taxation compares directly with default LLC treatment.

C-Corp is the better choice when:

• You're raising venture capital or angel investment
• You plan to issue multiple classes of stock (common and preferred)
• You have foreign investors or corporate shareholders
• You plan to go public (IPO) or be acquired
• You want to retain profits in the business at the 21% corporate rate

Most startups on the VC track incorporate as C-Corps in Delaware specifically because investors expect it. If you're building a high-growth company seeking outside capital, C-Corp is almost always the right structure.

If you've determined that an S-Corporation is the right structure for your business, Otto's end-to-end S-Corp services handle setup, filings, and ongoing management:

• S-Corp election: We guide you through filing IRS Form 2553 correctly and on time.
• Payroll: Otto processes your salary compliantly so you meet the reasonable salary requirement.
• Bookkeeping: Automated transaction categorization keeps salary and distribution records clean.
• Tax readiness: Your books are always organized for your annual Form 1120-S filing.