Starting a business is exciting. But choosing the right business structure can feel confusing. Two common options are S corporations and C corporations. They both offer liability protection, but they are taxed differently and work best in different situations.
At Local Tax, we help business owners understand their options so they can choose what makes sense for their goals.
What Is a C Corporation?
A C corporation is a separate legal entity from its owners. This means the business can enter into contracts, own property, and be sued under its own name.
How C Corporations Are Taxed
C corporations pay corporate income tax on their profits. If the corporation distributes profits to shareholders as dividends, those dividends are taxed again on the shareholder’s personal tax return.
This is called double taxation.
When a C Corporation Makes Sense
A C corporation may be a good option if:
- You plan to raise money from investors
- You want to issue different types of stock
- You plan to reinvest profits back into the business
- You expect to grow into a larger company
C corporations do not have ownership limits. They can have unlimited shareholders, including foreign investors.
What Is an S Corporation?
An S corporation is not a separate type of corporation under state law. It is a tax election made with the IRS. The business is still formed as a corporation, but it chooses to be taxed differently.
How S Corporations Are Taxed
S corporations do not pay federal income tax at the corporate level. Instead, profits and losses pass through to the owners. The owners report this income on their personal tax returns.
This avoids double taxation.
Payroll and Salary Rules
If you work in your S corporation, you must pay yourself a “reasonable salary.” That salary is subject to payroll taxes. Any additional profit can be taken as distributions, which are not subject to self-employment tax.
This is why many small business owners choose S corporations.
Key Differences Between S Corporations and C Corporations
Here are some of the main differences:
Taxes
- C corporation: taxed at the corporate level and again on dividends
- S corporation: income passes through to owners
Ownership
- C corporation: unlimited shareholders
- S corporation: limited to 100 shareholders
Stock Options
- C corporation: can issue multiple classes of stock
- S corporation: only one class of stock
Foreign Ownership
- C corporation: allowed
- S corporation: not allowed
Which One Is Better?
There is no one-size-fits-all answer.
Many small businesses choose an S corporation because it can reduce self-employment taxes. But not every business qualifies, and not every situation benefits from it.
If you plan to bring in investors, grow nationally, or go public one day, a C corporation might make more sense.
The right choice depends on:
- Your income level
- Your long-term plans
- Whether you have partners
- Whether you plan to reinvest profits
- Your tax situation
Choosing the wrong structure can cost you money.
How Local Tax Can Help
At Local Tax, we help business owners:
- Form LLCs and corporations
- File S corporation elections
- Set up payroll correctly
- Stay compliant with federal and state tax rules
- Plan ahead to reduce taxes legally
If you’re not sure whether an S corporation or a C corporation is right for you, we can walk you through the numbers and explain it in simple terms.
Visit us at:
Local Tax
9429 Somerset Blvd
Bellflower, CA 90706
Phone: (562) 925-2203
We’re here to help you start smart and grow with confidence.
