S Corp vs C Corp: Taxes, Ownership, and When Each Fits (2026)

Q: How many shareholders can an S corp have?

No more than 100. Under IRS rules and 26 U.S. Code Section 1361, an S corporation must be a domestic entity, have only one class of stock, and have only allowable shareholders. Partnerships, corporations, and non-resident aliens cannot be shareholders.

Fact-checked by the LegalGlass editorial team against primary sources · Published Aug 6, 2026 · Last updated Aug 6, 2026

Both are corporate tax statuses under the same state-law corporation. Choose a C corp if you plan to raise venture capital, take on foreign or entity investors, or retain earnings; choose an S corp if you are a small, closely held US business trying to avoid the 21% corporate-level double tax.

An S corporation and a C corporation are not two different legal entities - they are two federal tax treatments of a corporation (or an eligible entity electing corporate status). Every corporation is a C corporation by default and taxed under Subchapter C; it becomes an S corporation only when it files an election and meets strict ownership limits. The decision turns on how profits are taxed and who is allowed to own the company.

Quick Answer

What each is: Two federal tax statuses of a state-law corporation (Subchapter C vs Subchapter S)
Choose a C corp if: You will raise venture capital, want foreign/entity investors or multiple stock classes, or plan to retain and reinvest profits
Choose an S corp if: You are a small, closely held US business that wants pass-through taxation and no corporate-level income tax
C corp tax: Flat 21% corporate income tax, then a second tax on dividends (double tax)
S corp tax: Pass-through; income taxed once, on shareholders' returns
S corp limits: ≤100 shareholders · one class of stock · US individuals/certain trusts only
How to elect S: File IRS Form 2553, signed by all shareholders

S Corp vs C Corp: Side-by-Side Comparison

The table compares a corporation taxed under default Subchapter C rules with the same corporation after it elects S status. Figures are federal and effective for the 2026 tax year unless noted; state fees and taxes are separate.

Factor	C corporation (default)	S corporation (elected)
Tax regime	Subchapter C - taxed as a separate entity	Subchapter S - pass-through to shareholders
Entity-level income tax	Flat 21% on taxable income	None on ordinary income (limited built-in-gains/passive tax may apply)
Second layer of tax	Yes - dividends taxed again to shareholders (double tax)	No - income taxed once
Federal return	Form 1120	Form 1120-S plus Schedule K-1 to each owner
Shareholder limit	Unlimited	No more than 100
Who can own	Individuals, corporations, partnerships, foreign persons	US individuals, certain trusts and estates only
Classes of stock	Multiple (common, preferred) allowed	One class of stock only
Best for	Venture capital, going public, retaining earnings	Small, closely held, profit distributed to owners
To adopt	Default on incorporation	File Form 2553 with the IRS

Both Are Tax Statuses of the Same Corporation

A C corporation and an S corporation begin as the same thing: a corporation formed under a state's corporation statute, with directors, officers, bylaws, and stock. The "C" and "S" refer only to the subchapter of the Internal Revenue Code that governs federal taxation. The IRS describes a C corporation as a "separate taxpaying entity" that "conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders." An S corporation, by contrast, is a corporation that has elected "to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes." The underlying company, its liability shield, and its state filings do not change when it elects S status. If you are weighing a corporation against an unincorporated option, see LLC vs corporation and the C corporation glossary entry.

How Each Is Taxed

Taxation is the core difference. A C corporation is taxed twice. First, the entity pays corporate income tax: 26 U.S. Code § 11 imposes a tax "on the taxable income of every corporation" equal to "21 percent of taxable income" - a flat rate effective for tax years beginning after December 31, 2017. The corporation reports this on Form 1120, "U.S. Corporation Income Tax Return." Second, when after-tax profit is distributed, the IRS states that "the profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends," which "creates a double tax." The corporation gets no deduction for those dividends. Compare the mechanics on our business tax overview.

An S corporation is taxed once. Under 26 U.S. Code § 1366, each shareholder reports "the shareholder's pro rata share" of the corporation's income and loss on their own return, with deductible losses limited to basis in stock plus loans. The entity itself files Form 1120-S and issues a Schedule K-1 to each owner, but generally pays no federal income tax on ordinary income - though it can still owe an entity-level tax "on certain built-in gains and passive income." Because profit is not taxed at the corporate level, an S corporation sidesteps the second layer that makes the C corporation "double tax." Owners who take profit as distributions instead of wages can also reduce self-employment-equivalent payroll tax, a trade-off covered in LLC or S corp.

Ownership and Stock: Where the Structures Diverge

Ownership rules, not just tax rates, often decide the question. A C corporation has no shareholder cap and few ownership restrictions. It "can raise funds through the sale of stock," per the U.S. Small Business Administration, may issue multiple classes of stock - common and preferred, with different voting and liquidation rights - and can be owned by other corporations, partnerships, and foreign persons. Those features are exactly what venture investors require.

An S corporation is deliberately constrained. To qualify as a "small business corporation" under 26 U.S. Code § 1361(b) and the IRS, it must be a domestic entity, have "no more than 100 shareholders," have "only one class of stock," and have "only allowable shareholders," which "may be individuals, certain trusts, and estates." Critically, shareholders "may not be partnerships, corporations or non-resident alien shareholders." A single foreign investor, a venture fund organized as a partnership, or a second class of preferred stock will disqualify the election. That is why an S corporation suits a small, US-only, closely held ownership group and a C corporation suits a company built to raise outside capital.

When a C Corp Is the Better Fit

A C corporation tends to fit when the company needs outside capital, flexible ownership, or to keep profit inside the business. Consider C corporation status when several of these are true:

You plan to raise venture capital or go public. The SBA calls the corporation "a good choice for medium- or higher-risk businesses, those that need to raise money, and businesses that plan to 'go public' or eventually be sold." Institutional investors almost always require a C corporation with preferred stock.
You want foreign or entity investors. A C corporation can be owned by non-resident aliens, other corporations, and partnerships - all barred from an S corporation's ownership.
You will retain and reinvest earnings. The flat 21% rate under § 11 can be lower than a high earner's individual rate, so profit kept in the business - not distributed - may face only the corporate layer until it is paid out.
You want multiple stock classes or broad benefit plans. A C corporation can issue common and preferred stock and deduct a wider range of fringe benefits for owner-employees.

The cost is the double tax: distributed profit is taxed at 21% at the entity and again as a dividend to shareholders, per the IRS.

When an S Corp Is the Better Fit

An S corporation tends to fit a small, closely held, US-owned business whose owners want profit taxed once, on their personal returns. Consider S corporation status when:

You want to avoid double taxation. The SBA notes S corps are designed to "avoid the double taxation drawback of regular C corps"; income passes through untaxed at the entity level under § 1366.
Your ownership fits the limits. No more than 100 US individual (or certain trust/estate) shareholders and a single class of stock, per § 1361(b).
Owners are active and take pay as salary plus distributions. A shareholder who performs services must receive reasonable wages, but distributions beyond that salary can reduce payroll tax - see Form 2553 explained.
You distribute most profit rather than reinvesting it. Pass-through treatment is most valuable when earnings leave the company each year.

Salaries paid to shareholder-officers must be reasonable; the IRS treats "payments to the corporate officer" who provides services "as wages," and a too-low salary invites reclassification, back taxes, and penalties.

How to Switch Between C Corp and S Corp

Moving between the two is a tax-status change, not a re-formation - the corporation keeps its name, EIN, and state charter. To become an S corporation, an eligible entity files Form 2553, "Election by a Small Business Corporation," under section 1362(a). Every shareholder must consent: 26 U.S. Code § 1362 makes an election "valid only if all persons who are shareholders" on the day it is made sign on. Timing is strict - the Instructions for Form 2553 require filing "no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding" it (generally March 15 for a calendar-year election effective January 1). Late filers may qualify for relief under Rev. Proc. 2013-30 "within 3 years and 75 days of the effective date."

To go the other direction - S corporation back to C corporation - shareholders holding "more than one-half of the shares of stock" revoke the election under § 1362. After a termination or revocation, the IRS generally bars re-electing S status for five years without consent. A C corporation files Form 1120 "by the 15th day of the 4th month after the end of its tax year" (April 15 for calendar-year filers), with a six-month extension on Form 7004, per the Form 1120 instructions.

Common Mistakes to Avoid

Assuming S corp always beats C corp. Retaining earnings at the flat 21% rate can beat pass-through for a high-income owner who reinvests rather than distributes.
Electing S with ineligible owners. A single foreign shareholder, a partnership or corporate owner, or a 101st shareholder disqualifies or terminates the election under § 1361.
Issuing a second class of stock. Preferred stock or disproportionate distribution rights break the one-class-of-stock rule and end S status.
Missing the Form 2553 deadline, generally 2 months and 15 days into the tax year, forcing reliance on Rev. Proc. 2013-30 relief.
Setting an S corp officer salary too low. The IRS can recharacterize distributions as wages, with back payroll tax and penalties.
Forgetting the annual return. A C corp files Form 1120; an S corp files Form 1120-S each year - the election does not remove the filing obligation.

Frequently Asked Questions

What is the main difference between an S corp and a C corp?

Both are corporate tax statuses. A C corporation is taxed as a separate entity at 21% and its dividends are taxed again to shareholders, creating a double tax. An S corporation elects to pass income through to shareholders, who report it on their own returns, avoiding entity-level income tax.

Is an S corp or C corp better for taxes?

It depends. An S corporation avoids the C corporation double tax by passing income through to shareholders. A C corporation pays a flat 21% corporate rate and pays a second tax on dividends, but can retain earnings and offer more deductible benefits. Neither is universally better.

Why do venture-backed startups choose C corp?

A C corporation has no shareholder cap, may issue multiple classes of stock, and can have foreign and entity investors. The SBA notes corporations can raise funds through the sale of stock, making the C corporation the standard structure for venture capital and companies that plan to go public.

How many shareholders can an S corp have?

No more than 100. Under IRS rules and 26 U.S. Code § 1361, an S corporation must be a domestic entity, have only one class of stock, and have only allowable shareholders. Partnerships, corporations, and non-resident aliens cannot be shareholders.

Can an S corp have foreign shareholders?

No. An S corporation cannot have non-resident alien shareholders, per IRS eligibility rules. A C corporation has no such restriction and may be owned by foreign individuals, other corporations, and partnerships, which is one reason foreign-owned businesses often default to C corporation status.

How do you switch from C corp to S corp?

File IRS Form 2553, signed by all shareholders, no more than 2 months and 15 days after the start of the tax year the election takes effect, or during the prior year. The corporation must first meet every S corporation eligibility requirement.

Sources

IRS - Corporations (separate taxpaying entity; double tax; Form 1120).
IRS - S Corporations (definition, eligibility, 100 shareholders, one class of stock).
IRS - About Form 1120 (U.S. Corporation Income Tax Return).
IRS - Instructions for Form 1120 (15th day of the 4th month; Form 7004).
IRS - About Form 1120-S (S corporation return; Schedule K-1).
IRS - About Form 2553 (election by a small business corporation).
IRS - Instructions for Form 2553 (2 months 15 days deadline; Rev. Proc. 2013-30).
IRS - S Corporation Employees, Shareholders and Corporate Officers (reasonable wages).
SBA - Choose a Business Structure (C corp raising capital; S corp double-tax avoidance).
Cornell LII - 26 U.S. Code § 11 (21% corporate tax rate).
Cornell LII - 26 U.S. Code § 1361 (small business corporation limits).
Cornell LII - 26 U.S. Code § 1362 (election, consent, revocation).
Cornell LII - 26 U.S. Code § 1366 (pass-through; basis limit).

LegalGlass provides general information for educational purposes and is not a law firm or a substitute for advice from a licensed attorney or tax professional. Whether a C corporation or an S corporation fits a business depends on facts this page cannot assess. Verify with the IRS before acting.