Choosing the right corporate structure is one of the most important decisions a business owner can make. Among the most common options are S Corporations and C Corporations. While both are formed under state law as corporations and provide limited liability protection to their owners, they differ significantly in terms of taxation, ownership restrictions, and operational flexibility.
This article explores the key differences between S Corporations and C Corporations, helping business owners understand which structure may best support their long-term goals.
Corporate Structure and State Law
At the most basic level, both S Corporations and C Corporations begin the same way: they are created by filing Articles of Incorporation with the appropriate Secretary of State. Whether a business is based in North Carolina, South Carolina, or Tennessee, the process of incorporating and gaining limited liability protection remains largely the same. Both entity types are eligible for favorable provisions such as Internal Revenue Code § 1244, which allows shareholders to deduct losses on qualifying small business stock.
The distinction between S Corps and C Corps arises not from state law, but from how the business elects to be treated for federal tax purposes under the Internal Revenue Code.
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Tax Treatment: The Core Distinction
The most significant difference between an S Corporation and a C Corporation lies in their federal taxation.
C Corporations are subject to “double taxation.” The corporation pays tax on its profits, and shareholders must also pay tax on dividends they receive. For companies expecting to retain earnings or reinvest profits for growth, this can be a manageable outcome, but it does reduce overall tax efficiency in many small business contexts.
S Corporations, on the other hand, are pass-through entities for tax purposes. This means the corporation itself does not pay federal income tax. Instead, profits (and losses) “pass through” to shareholders, who report them on their personal tax returns. This avoids double taxation and often results in a lower overall tax burden, especially when selling assets or distributing earnings.
However, to make an S election, a corporation must meet specific eligibility criteria.
Eligibility Requirements for S Corporations
Not every corporation can elect to be an S Corporation. To qualify, a business must be a “small business corporation” as defined by the Internal Revenue Code. Among other things, the corporation must:
- Have no more than 100 shareholders;
- Issue only one class of stock;
- Be owned only by eligible shareholders, which includes individuals, certain trusts, and estates, but not partnerships or foreign entities.
These limitations can make the S Corporation structure ideal for closely-held businesses, but impractical for startups planning multiple rounds of complex financing or diverse equity arrangements.
Advantages of the C Corporation
While S Corporations offer tax simplicity for small businesses, C Corporations provide greater flexibility in raising capital and structuring ownership. They can issue multiple classes of stock, each with its own voting and dividend rights. This is a crucial tool for companies attracting outside investors, structuring founder shares, or setting up employee equity plans.
Additionally, C Corporations can offer a broader range of fringe benefits to employees, including health insurance and retirement plans, without those benefits being taxed as compensation to shareholder-employees. These benefits often make the C Corporation a more attractive choice for businesses looking to scale operations or build larger teams.
Twisdale Law, PC and Corporate Structuring Services
At Twisdale Law, PC, we assist business owners across North Carolina, South Carolina, and Tennessee in selecting and maintaining the corporate structure that aligns with their goals. Whether you are forming a new entity or considering a change to an existing company’s tax election, our firm is equipped to guide you through the process.
We routinely help clients navigate S Corporation elections, shareholder agreements, and state compliance requirements, ensuring that their business structure supports both legal protection and long-term planning.
If you’re forming a business or considering whether to elect S Corporation status, it’s critical to understand the legal and tax implications of each structure. Twisdale Law, PC provides clear, strategic counsel to businesses across the Carolinas and Tennessee.
Contact us today to schedule a consultation and learn how your business can benefit from the right corporate structure.
