C-Corp vs S-Corp, which one fits?
An S-Corp passes profit to its owners, who pay tax once at their own rates and save payroll tax on distributions. A C-Corp pays a flat 21% corporate tax, and owners pay again on dividends. Most small, owner-run businesses do better as S-Corps. Companies raising venture money usually choose C-Corps.
Updated November 2026 · By Pankil Kumar, Managing Partner
Quick facts
- C-Corp rate. Flat 21% federal corporate tax
- S-Corp. Profit passes through to owners
- Investors. Venture investors usually require a C-Corp
How are C-Corps and S-Corps taxed?
A C-Corp is a separate taxpayer. It pays a flat 21% federal tax on its profit. When it pays dividends, shareholders pay tax again, usually at 15% or 20% plus the 3.8% net investment income tax at higher incomes. That's the "double tax".
An S-Corp doesn't pay federal income tax. Its profit passes through to the shareholders, who pay tax at their own rates. Owners who work in the business take a reasonable salary through payroll, and the rest comes out as distributions without Social Security and Medicare tax. Owners may also get the qualified business income deduction of up to 20%.
How do the numbers compare?
Say a company earns $200,000 of profit after paying its owner a $100,000 salary, and the owner wants all of it.
| Step | C-Corp | S-Corp |
|---|---|---|
| Entity-level federal tax | $42,000 (21%) | $0 |
| Left to pay out | $158,000 as dividends | $200,000 as distributions |
| Owner's federal tax on the payout | Up to 23.8% (15% or 20%, plus 3.8% at higher incomes) | Income tax at the owner's rate, less the QBI deduction |
The S-Corp usually wins when the owner takes the money out. The C-Corp can win when profit stays in the company to grow, because 21% may be lower than the owner's personal rate.
When does a C-Corp make sense?
- You're raising venture capital. Investors want preferred stock, which an S-Corp can't issue
- You'll sell the company. Qualified small business stock under Section 1202 can exclude a large part of the gain from tax if the requirements and holding period are met
- You keep profits in the business. Reinvested profit is taxed only at 21% until it's paid out
- You have non-US or entity owners. S-Corps can't have non-resident alien, partnership or corporate shareholders
When does an S-Corp make sense?
- You run the business and take most of the profit out each year
- Profit is high enough that the payroll tax saved beats the extra cost of payroll and a separate return
- All owners are US individuals and you're fine with one class of stock
Run your numbers in the S-Corp calculator, and read S-Corp vs LLC if you haven't formed yet. You can elect S-Corp status with Form 2553.
Sources
General information, not tax advice for your situation.
Want a plan for this year?
We run your numbers and show you the options.
See our tax planning and CFO serviceCan I switch from a C-Corp to an S-Corp?
Yes, by filing Form 2553 if you meet the rules. Gains built up while you were a C-Corp can still be taxed if you sell assets within five years.
Is an LLC a C-Corp or S-Corp?
Neither by default. An LLC is taxed as a sole proprietorship or partnership unless it elects to be taxed as a C-Corp or an S-Corp.
Do C-Corps pay state tax?
Most states tax corporate income. Some also tax S-Corps at the entity level, and Texas charges franchise tax on both.
Which is better for a one-person business?
Usually an S-Corp, once profit is steady and high enough to justify payroll. A C-Corp mainly helps if you plan to keep profit in the company or sell it.
Tell us what's messy. We'll tell you what it takes.
Tell us what you need and get a fixed price before any work starts. No pressure and no contract.