⚡ Quick Verdict
Choose S-Corp if you have fewer than 100 US shareholders and want to avoid double taxation. Choose C-Corp for unlimited growth potential, foreign investors, and stock options.
📊 Full Feature Comparison
| Feature | S-Corp | C-Corp |
|---|---|---|
| Double Taxation | ✅No — pass-through taxation | Yes — corporate income + dividend tax |
| Self-Employment Tax | ✅Only on salary (distributions exempt) | No SE tax (but dividends taxed) |
| Max Shareholders | 100 shareholders | ✅Unlimited |
| Foreign Ownership | Not allowed | ✅Fully allowed |
| Stock Classes | One class only | ✅Multiple classes (common, preferred) |
| VC Fundraising | Difficult (no preferred stock) | ✅Standard (preferred stock available) |
| QSBS Eligibility | Not eligible for QSBS exclusion | ✅Eligible for Section 1202 (100% cap gains exclusion) |
| Retained Earnings | Taxed to shareholders even if not distributed | ✅Can retain and reinvest at 21% rate |
| Compliance | Annual meetings, minutes, payroll | Annual meetings, minutes |
| Best For | Profitable small businesses <$5M revenue | Growth startups, public companies |
❓ Frequently Asked Questions
What is the main advantage of S-Corp over C-Corp?
The main advantage is avoiding double taxation. S-Corp income passes through to shareholders' personal returns, avoiding the corporate-level tax. Distributions above reasonable salary also avoid self-employment tax.
Can I switch from S-Corp to C-Corp?
Yes. You can revoke your S-Corp election by filing with the IRS. However, once you revoke, you generally cannot re-elect S-Corp status for 5 years. This is common for startups preparing for VC fundraising.
Why do startups choose C-Corp over S-Corp?
Startups choose C-Corp because venture capital firms require the ability to issue preferred stock (not allowed in S-Corps), they may have foreign investors (not allowed in S-Corps), and C-Corp founders can benefit from the QSBS capital gains exclusion under Section 1202.