S-Corp vs C-Corp: Double Taxation & Shareholder Limits
Why a C-Corp is taxed twice, how an S-Corp avoids it, and the shareholder rules that decide which one venture capital will accept.
Both S-Corp and C-Corp are corporations, but they are taxed very differently. A C-Corp pays the 21% federal corporate income tax on its profit, and when it distributes after-tax profit to shareholders as dividends, those dividends are taxed again on the personal return — the well-known "double taxation." An S-Corp is a pass-through: the corporation itself pays no entity-level tax, and profit flows to shareholders via Schedule K-1, taxed once.
| Dimension | S-Corp | C-Corp |
|---|---|---|
| Liability protection | Full separation; shareholders liable only to the extent of investment. | Full separation; same strong shield. |
| Taxation | Pass-through — profit taxed once on shareholder returns; owner takes a reasonable W-2 salary. | Double taxation — 21% corporate rate, then dividends taxed again at individual rates. |
| Setup cost | Form corp + IRS Form 2553; modest. | Form corp + stock issuance; modest to slightly higher. |
| Compliance burden | Moderate — payroll, Form 1120-S, reasonable-salary docs. | High — board minutes, Form 1120, strict formalities. |
| Equity & investor limits | Max 100 U.S. individual shareholders, one class of stock — foreign and entity owners not allowed. | Unlimited shareholders, multiple stock classes, foreign and entity owners allowed. |
| Best for | Profitable U.S.-owned businesses avoiding double tax. | Startups raising venture capital or keeping earnings inside the company. |
Why double taxation still makes sense sometimes
If you reinvest most profit back into the business rather than paying it out as dividends, the C-Corp's 21% rate can beat the higher individual rates an owner would pay on pass-through income. And only a C-Corp can issue preferred stock and accept foreign or institutional capital, which is why essentially every venture-backed startup is a C-Corp. An S-Corp's shareholder limits make it a non-starter for VC.
Note: This comparison is educational reference, not legal advice (非法律建议). Entity and tax rules differ by state — confirm with a licensed attorney in your state before choosing a structure.