A business can be carried out by several type of entities and at different scales i.e., from an individual run sole proprietorship to a large public listed corporation. The type of entity structure chosen depends on several factors. A small scale or low funding business can be run by a sole proprietor and a business which requires joint expertise may opt for a partnership structure. As the scale of operations increases and more and more funding is envisaged, incorporated structures which have the capacity to have large number of co-owners are preferred.

This article looks at meanings of and differences between two types of corporation structures – C-corporation and S-corporation.

Definitions and meanings


A C-corporation is that form of an incorporated business structure which as per Internal Revenue Code (IRC) rules is subject to a two-level tax structure. This means that the company is charged corporate tax on its income earned and the individual owners are taxed personally as well on dividends earned from the company.

C-corporation is the default structure under IRC rules i.e., every corporation is at first incorporated as a C-corporation. It thus has all company features and benefits such as unlimited members and limited liability etc.


An S-Corporation is that type of incorporated entity which has been allowed special ‘pass-through’ tax status under IRC rules. This means that double taxation is sought to be avoided as there is no corporate income tax payable by the company and the income earned is directly taxed in the hands of the owners. An S-corporation also has the benefit of limited liability as applicable to any incorporated business entity.

In order for a corporation to qualify as S-corporation, it must make a special application by filing a form known as “Form-2553” with the Internal Revenue Services(IRS) department after it has been incorporated.

Differences between C-corporation and S-corporation

Ten main points of difference between C-corporation and S-corporation have been listed below:

1. Meaning

  • A C-corporation is a default structure of an incorporated entity under IRC rules and thus has a two-level tax structure that involves both corporate tax and personal tax in hands of the shareholders.
  • An S-corporation is a special category of incorporated entities that have been accorded ‘pass-through’ tax status under specific rules of the IRC.

2. Tax provisions applicable

  • A C-corporation is subject to a two-level tax structure. The company is charged corporate tax on its profits and when these profits are distributed as dividend to its shareholders, they are charged to tax again on their personal income. Thus, a C-corporation structure leads to double taxation.
  • An S-corporation avoids this double taxation due to its special pass-through status. The corporation is not subject to any corporate income tax but the profits and taxability is passed on to the shareholders who are taxed.

3. Shareholding structure

  • A C-corporation does not have any restriction on the number of shareholders it can have. It can have any number of shareholders as well as can have different types or classes of shares in its capital structure.
  • In a S-corporation, the maximum number of shareholders is capped at 100. Furthermore, there are additional restrictions that all shareholders must mandatorily be US citizens/residents and that the corporation can have only one class of share.

4. Ownership structure

  • A C-corporation is not generally subject to any restrictions in terms of its ownership structure, that is its arrangement of parent companies and subsidiary companies.
  • An S-corporation, however, cannot be incorporated under other pass-through entities such as other S-corporations, LLPs, partnerships etc.

5. Eligibility

  • Any type of business can be incorporated as a C-corporation.
  • An S-Corporation has more specific eligibility criteria; certain type of entities such as banks and insurance companies, for example, are not eligible to be accorded the status of S-corporation.

6. Suitability

  • C-corporations are especially suitable for businesses that have high funding requirements and wish to take an initial public offering (IPO) or similar route to gather large number of investors.
  • S-Corporations are more suitable for smaller set ups that wish to avoid the double taxation in early stages of their business.

7. Benefits (apart from usual benefits of incorporated entities)

  • C-corporations’ key benefit is that it is flexible on ownership structure and thus more conducive for business expansion as they can have unlimited shareholders with various classes of shares to structure their capital.
  • The key benefits of S-corporations stem from their pass-through structure which allows them to avoid double taxation. It also allows pass through of losses to shareholders who can set it off against their other personal incomes.

8. Drawbacks

  • The main disadvantage of C-corporations is that they are subject to double taxation.
  • In case of S-corporations, the restrictions on quantum and type of shareholders is the main drawback which restricts their ability to raise more finance.

9. How it comes into existence

  • A C-corporation comes into existence by default once it is incorporated and its articles of associations are duly filed.
  • An S-corporation becomes so when a specific application is made by filing Form-2553 under chapter S of the IRC.

10. Prevalence

  • C-corporations are the most common type of corporations in USA.
  • S-corporations, with specific eligibility criteria, are far less common.


Irrespective of whether an incorporated entity remains a C-corporation or specifically becomes an S-corporation, it will enjoy the benefits of a company structure as well as will be subject to its compliance requirements. Both C-corporations and S-corporations enjoy limited liability i.e., the liability of its owners are restricted to their share of capital. Both the entities are also required to comply with all company requirements – such as holding meetings, voting rules, filing of periodic returns and statements etc. The type of corporation structure will be a judgement call that management would take from time to time depending on its specific business requirements.