01 — FoundationsWhat "S Corp" and "C Corp" Actually Mean
The names come from the US Internal Revenue Code. C Corporations are taxed under Subchapter C of Chapter 1. S Corporations are taxed under Subchapter S. That is the entire origin of the labels — they describe federal tax treatment, nothing more.
Under state law, both are simply corporations. You file the same Articles of Incorporation with the Secretary of State, pay the same filing fee, name the same registered agent, and authorise the same shares. The state does not know — and does not care — whether your corporation will be taxed under Subchapter C or Subchapter S. That decision is made later, with the IRS, by filing Form 2553.
If you do nothing after forming a corporation, the IRS treats it as a C Corp by default. The S Corp is the elective alternative — available only to entities that meet a strict set of eligibility tests laid out in IRC Section 1361.
03 — The Core DifferenceFederal Taxation: Where the Money Actually Goes
This is the difference that drives every other comparison. A C Corp is its own taxpayer; an S Corp is a flow-through entity. That single distinction changes how — and how often — your profits are taxed.
How a C Corp Is Taxed
The C Corp files Form 1120 and pays a flat 21% federal corporate income tax under IRC Section 11(b). State corporate taxes apply on top, ranging from 0% in states like Wyoming and South Dakota to over 10% in others.
When the corporation distributes after-tax profits as dividends, shareholders pay tax again — at qualified dividend rates of 0%, 15%, or 20%, plus the 3.8% Net Investment Income Tax for high-income shareholders. This is the famous "double taxation" of the C Corp model.
Take a C Corp earning $100,000 in profit and distributing all of it. The corporation pays 21% federal tax — leaving $79,000. A shareholder in the 20% qualified dividend bracket pays another $15,800 on the dividend. The $100,000 of profit becomes $63,200 in the shareholder's pocket; state taxes and the 3.8% NIIT can push the combined effective rate above 40%.
This double layer applies only to distributed profits. Earnings the corporation reinvests are taxed once at 21% — which is why C Corps suit businesses that retain earnings to fund growth.
How an S Corp Is Taxed
The S Corp pays zero federal income tax at the corporate level. It files Form 1120-S as an informational return and issues each shareholder a Schedule K-1. Shareholders report their share on personal returns and pay at individual rates — currently ranging from 10% to 37%. One layer of tax. That is the entire point of Subchapter S.
S Corp owners may also qualify for the Qualified Business Income (QBI) deduction under IRC Section 199A, which lets eligible pass-through owners deduct up to 20% of qualified business income before computing personal tax. The One Big Beautiful Bill Act made this deduction permanent starting in 2026.
The Self-Employment Tax Advantage
S Corps offer a structural payroll-tax saving. A shareholder who works in the business is paid a "reasonable salary" subject to FICA. Profits beyond that salary are distributions, not wages — and distributions are not subject to FICA.
The IRS watches this closely. Set the salary too low and the agency will reclassify distributions as wages and add back the payroll tax with penalties. Done correctly, the split saves several thousand dollars a year for a shareholder-employee earning above $80,000 in net profit.
"The S Corp vs C Corp comparison comes down to a single question: where does the tax bill land? A C Corp is its own taxpayer at 21%. An S Corp moves the tax to your personal return — once, at your individual rate — and lets you split it between salary and distribution."
04 — EligibilityOwnership Rules and Why They Matter
The S Corp's tax advantages come with strings attached. Subchapter S exists for closely-held domestic businesses, and the eligibility rules in IRC Section 1361 are designed to keep it that way. The C Corp, by contrast, has no ownership restrictions whatsoever. Failing any single test below disqualifies an entity from electing S status — or terminates an existing election if the failure occurs after the election is in place.
| Requirement | S Corp | C Corp |
|---|---|---|
| Domicile | Must be a domestic corporation | Domestic or foreign |
| Maximum shareholders | 100 | Unlimited |
| Who may own shares | Individuals only (plus narrow trust and estate exceptions) | Any person or entity — individuals, corporations, partnerships, trusts, foreign owners |
| Non-resident aliens permitted? | ✗ Prohibited | ✓ Allowed |
| Classes of stock | One class only (voting differences allowed) | Multiple classes — common, preferred, convertible |
| Ineligible entity types | Certain banks, insurance companies, and DISCs cannot elect | No restrictions |
Why the Single-Class-of-Stock Rule Matters
The one-class rule is the silent dealbreaker for S Corps that try to raise outside capital. Venture capital deals are built around preferred stock — shares with liquidation preferences, anti-dilution rights, and dividend priority. An S Corp cannot issue preferred stock without losing its S election. Convertible notes, SAFE agreements with most-favoured-nation provisions, and weighted voting structures all collide with Subchapter S. This is why every venture-backed startup in the United States is a Delaware C Corp — the choice is structural, not aesthetic.
05 — The Non-Resident RealityWhy Foreign Founders Cannot Use the S Corp
A non-resident alien cannot directly own shares in a US S Corporation. This is not a planning preference or a complication — it is an absolute eligibility rule written into the Internal Revenue Code, and it is the single most important fact for a non-resident founder weighing US corporate structures.
The rule lives in IRC Section 1361(b)(1)(C), and the implementing regulation at Treasury Regulation §1.1361-1(g) states it plainly: a corporation having a non-resident alien as a shareholder does not qualify as a small business corporation, and therefore cannot be taxed as an S Corp. There is no individual-level workaround.
Who Counts as a "Resident" for This Rule
The IRS defines a US resident for tax purposes by one of two tests: the green card test (you hold lawful permanent resident status at any point during the year) or the substantial presence test (you are physically present in the US for at least 31 days in the current year and 183 days across the current and prior two years, using a weighted formula).
If neither test is met, you are a non-resident alien. Holding an ITIN does not, on its own, make you a resident. Owning a US LLC does not. Visiting the United States for business meetings does not.
What This Means in Practice
For a non-resident founder, the corporate structure choices in the United States are:
For most non-resident founders running a service business, e-commerce store, or SaaS company, the foreign-owned LLC is the correct answer. The C Corp becomes the right answer when institutional investors enter the picture, or when the founder anticipates a sale that could qualify for the QSBS exclusion.
06 — The Election ProcessHow to Elect S Corp Status: Form 2553 in Practice
For founders who are eligible — US citizens, green card holders, and those who pass the substantial presence test — the path to S Corp status runs through one document: IRS Form 2553, Election by a Small Business Corporation.
Form the underlying entity first
File Articles of Incorporation with your state, or form an LLC if you intend to make the entity-classification election as well. The entity must legally exist before the S election is filed.
Obtain an EIN
The S election cannot be processed without an Employer Identification Number. If your EIN is still pending, write "Applied For" on Form 2553 with the application date — but do not delay filing the form to wait. Details on the EIN process are in our EIN guide.
Confirm every shareholder is eligible
All shareholders must be eligible S Corp owners on the date of filing. Every single shareholder must sign the consent statement on Form 2553 — without exception. One missing signature voids the election.
All shareholders sign — no exceptionsFile within the deadline
For new entities, Form 2553 must be filed within 2 months and 15 days of the start of the tax year in which the election is to take effect. For existing entities, the form may be filed any time during the prior tax year. Calendar-year filers typically face a March 15 deadline.
Submit by fax or mail
The IRS does not accept Form 2553 electronically. Fax delivers near-instant confirmation; mail takes weeks. The mailing address and fax number depend on your state and are listed in the form's instructions.
Wait for the CP261 acceptance letter
The IRS typically responds within 60 days with a CP261 notice confirming acceptance. If you do not hear back within that window, call the IRS Business and Specialty line at 1-800-829-4933. Keep the letter — banks and accountants will ask for it.
07 — Side by SideS Corp vs C Corp: Full Comparison Table
| Feature | S Corporation | C Corporation |
|---|---|---|
| Federal income tax | None at corporate level — pass-through to shareholders | Flat 21% on taxable income |
| Tax form | Form 1120-S (informational) + Schedule K-1 to each shareholder | Form 1120 |
| Double taxation? | ✓ No — single layer at shareholder rates | ✗ Yes — corporate tax + dividend tax |
| QBI deduction (Section 199A) | ✓ Eligible — up to 20% deduction | ✗ Not eligible |
| Self-employment tax savings | ✓ Salary-distribution split | ✗ No structural advantage |
| QSBS Section 1202 exclusion | ✗ Not eligible | ✓ Up to $15M federal exclusion (per 2026 OBBBA rules) |
| Maximum shareholders | 100 | Unlimited |
| Eligible shareholders | US individuals only (citizens or resident aliens), plus certain trusts/estates | Any person or entity, including foreign owners and other corporations |
| Non-resident aliens permitted? | ✗ Prohibited (IRC §1361) | ✓ Permitted |
| Stock classes | One class only (voting/non-voting allowed) | Multiple — common, preferred, convertible |
| VC funding compatible? | ✗ Generally no — single-class rule blocks preferred stock | ✓ Standard for VC-backed startups |
| Election form | Form 2553 — by fax or mail only | None required — default classification |
| Election deadline (new entity) | 2 months and 15 days from tax year start | N/A |
| Reasonable salary requirement | Yes — for shareholder-employees | Standard payroll for employee-officers |
| Accumulated earnings tax exposure | None | 20% penalty on retained earnings >$250,000 without business need |
| Best fit | Profitable closely-held US service businesses, owner-operators | Growth-stage startups, businesses with foreign or institutional owners, capital-intensive operations |
08 — Decision FrameworkWhich Structure Actually Fits Your Business?
For a non-resident founder, the decision is binary before it is anything else: the S Corp is not on the menu. The practical question becomes whether to operate through a foreign-owned LLC or a C Corporation. For a US-resident founder, the full three-way choice opens up — and the answer depends on who owns the business, how profits are deployed, and whether outside capital is in the picture.
Choose a C Corporation if…
- You are a non-resident alien — you have no other corporate option if you want a corporation rather than an LLC.
- You plan to raise venture capital or angel investment that requires preferred stock.
- You expect to reinvest most profits into growth, or anticipate a sale that could qualify for the Section 1202 QSBS exclusion.
- You want flexibility to add foreign investors, corporate shareholders, or multiple stock classes later.
- Your shareholder count will exceed 100, or already does.
Choose an S Corporation if…
- You are a US citizen or resident alien (green card or substantial presence test).
- Your business is closely held — fewer than 100 shareholders, all individuals, all eligible.
- You plan to distribute most profits to owners regularly rather than reinvest at the corporate level.
- You want the salary-distribution split to reduce self-employment tax, and you qualify for the 20% QBI deduction.
- You have no plans to raise institutional capital that requires preferred stock.
Consider an LLC Instead
For many founders — both US-resident and non-resident — the LLC is a better starting point than either S Corp or C Corp. A US LLC gives liability protection without entity-level federal tax, supports any number of foreign owners, and can later elect S Corp tax treatment (if eligible) or C Corp tax treatment as the business evolves. We compare the LLC's tax mechanics against UK structures in our US LLC vs UK Ltd guide. Both structures require a registered agent in the state of formation regardless of which tax classification is later elected.
09 — FAQFrequently Asked Questions
Not Sure Which Structure Fits?
Corporatee forms US LLCs and C Corporations for non-resident founders — including registered agent, EIN, and ongoing compliance. We assess your situation, recommend the structure that fits, and handle the filings end-to-end.
