C Corp vs. S Corp: 2025 Guide to Taxes, Stock, and Owners

I still remember a founder named Maya sliding a coffee across the table and asking, “If I choose the wrong structure now, how hard is it to unwind later?” You might feel that same knot in your stomach. You want the right answer for taxes, investors, and payroll, and you do not want surprises when you file. The good news, you can make a smart call once you understand how ownership, stock rules, and taxes shape daily life in each structure.

Quick truth, both options create a real corporation with limited liability, you file Articles of Incorporation with a state, you keep minutes, issue shares, and you file a federal return each year. The fork in the road is the federal tax status you choose, either Subchapter C or Subchapter S. (irs.gov)

As you read, I will point to the exact IRS rules and forms so you can double check every step. When it helps, I will add short examples from real-world client scenarios. This is general education, not legal or tax advice, and it reflects rules available as of October 7, 2025.

Key takeaways

• C corporations pay tax at the entity level on Form 1120, then dividends to shareholders can be taxed again, which is the classic double taxation issue. The federal corporate tax rate is 21% under Section 11.
• S corporations are pass-throughs that file Form 1120‑S and issue each owner a Schedule K‑1. Many shareholders must also track basis on Form 7203.
• S corp eligibility has guardrails, no more than 100 shareholders, only eligible U.S. owners in most cases, and only one economic class of stock, voting differences are fine. (law.cornell.edu)
• Owner‑employees of S corps must take reasonable compensation before taking distributions, the IRS can reclassify underpaid wages.
• The Section 199A QBI deduction remains available for pass‑throughs in 2025 with inflation‑adjusted thresholds, for 2025 the threshold is $394,600 for joint filers and $197,300 for most others, with phase‑in ranges up to $494,600 and $247,300. Always model your situation. (irs.gov)

If you run a CPA or accounting firm, or you advise small businesses, you already know the workload behind these filings. Accountably integrates with U.S. workflows and standards so firms can keep compliance, payroll, and entity filings moving on time, while freeing your senior team for advisory work. Use that only when you need added hands, not as a substitute for judgment.

What C corps and S corps share

Whether you choose C or S status, you start with the same foundation, a state‑law corporation that shields owners and requires corporate formalities.

• You file Articles or a Certificate of Incorporation with the state, adopt bylaws, appoint directors and officers, issue shares, and keep minutes. You maintain a registered agent and file state annual reports as required.
• You obtain an EIN, keep good records, and file a federal return each year, Form 1120 for C corporations or Form 1120‑S for S corporations.
• An LLC can also elect to be taxed as a corporation, then it can make an S election if it qualifies.

Same legal shell, different federal tax elections. Your tax status, not your state charter, is what creates the C or S label at the federal level.

The differences that actually change your day to day

Taxes, one layer or two

• C corporation, the company pays income tax at 21% on taxable income using Form 1120. If the company pays dividends, shareholders may owe tax again. If you plan to reinvest profits for a while, double taxation may sting less.
• S corporation, the company files Form 1120‑S. Profits and losses pass through to owners on Schedule K‑1, which owners report on their individual returns. Shareholders often must file Form 7203 to support stock and debt basis.

Quick note for 2025 filers, the IRS updated guidance for K‑2 and K‑3 exceptions for 1120‑S filers starting with tax year 2024, which can reduce international reporting noise for qualifying domestic S corps. Check the current 1120‑S page before you file.

Ownership rules and investor access

• S corps face an owner cap of 100, plus strict eligibility, generally U.S. individuals and certain trusts, not partnerships, not corporations, and not nonresident aliens. One economic class of stock is required, voting differences are allowed.
• C corps have no federal limit on the count or nationality of shareholders, can accept entity investors, and can issue multiple classes of stock, which is why venture capital and private equity prefer them.

Reasonable salary and payroll

If you own and work in your S corp, you must pay yourself a reasonable salary before taking distributions. The IRS can reclassify distributions as wages if pay is too low. Factors include duties, time, training, and what similar roles pay. Good payroll hygiene protects your position. (irs.gov)

S corporations, when they shine

When your goal is tax efficiency with active owner involvement and you do not need institutional investors, S status can work beautifully.

How pass‑through treatment works

The S corp files Form 1120‑S, then issues each owner a Schedule K‑1. You report that income on your personal return, adjusted by basis, at‑risk, and passive activity rules. Many shareholders also complete Form 7203 to track stock and debt basis, which ties to whether losses can pass through and whether distributions are tax free. The IRS emphasizes these basis rules in its ongoing updates to the 1120‑S page, so keep an eye on that section each year. (irs.gov)

Here is a simple example. You and a co‑owner each hold 50 percent. The S corp earns 200,000 and pays each of you a reasonable salary. After salaries and expenses, 100,000 remains. Each of you receives a K‑1 for 50,000, subject to your basis and participation. You will not pay a corporate tax, you will report your share on your personal return.

Reasonable compensation, the payroll tax angle

Owner‑employees want to optimize for payroll taxes while staying compliant. The IRS position is clear. Pay a reasonable salary for the services you perform, then distribute any extra profit. The Service can reclassify distributions into wages if you underpay, and courts have backed that view. To set the number, look at your role, hours, training, and what the market pays. Document it each year. (irs.gov)

Practical tip, write down your role and comparable pay data before year end. That memo is your first line of defense if the IRS asks why your wages were reasonable. (irs.gov)

199A QBI, 2025 thresholds to know

If you qualify, you may deduct up to 20 percent of qualified business income. For tax years beginning in 2025, the threshold is $394,600 for joint filers and $197,300 for most others, with phase‑ins to $494,600 and $247,300. Thresholds adjust for inflation, and some states do not conform, so always model your facts. (irs.gov)

Limits that matter, eligibility and one class of stock

S status comes with strict rules.

• No more than 100 shareholders, with special family aggregation rules.
• Only eligible shareholders, generally U.S. individuals and certain trusts, not partnerships or C corporations, not nonresident aliens.
• Only one economic class of stock, identical rights to distributions and liquidation proceeds, voting differences are allowed.

Why investors care, preferred stock is off the table in an S corp. Side letters that change economic rights can accidentally create a second class of stock. Even a sloppy note or warrant can do it. Keep your charter, bylaws, and related agreements aligned with the one‑class rule.

S corporation drawbacks in plain English

• Investor limits, the 100‑owner cap and eligibility rules block many funds, corporate investors, and foreign backers.
• Single class of stock, you cannot offer liquidation preferences or preferred dividends, which are standard in venture deals.
• Compliance sensitivity, a transfer to an ineligible owner can terminate S status. Curing mistakes can be costly and sometimes retroactive.
• Payroll discipline, reasonable compensation takes planning, documentation, and clean payroll execution.

Capital‑raising constraints for S corps

The investor universe narrows under S rules. With the owner cap, strict eligibility, and one‑class requirement, you will not be able to offer the preferred shares that institutional investors expect. Secondary sales and recapitalizations get harder too, since every change needs to preserve eligibility. If your roadmap includes venture money, you will likely choose a C corp earlier to avoid restructuring mid‑round.

If you represent a busy CPA firm managing these elections and cap table cleanups, this is where additional back‑office capacity helps. Accountably’s white‑label teams can prepare 2553 packages, track shareholder affidavits, and coordinate payroll setups while your partners focus on client advisory work.

C corporations, when they shine

If your plan includes outside capital, multiple share classes, or a possible IPO, the C corporation is the standard path.

Investor access and stock flexibility

• Unlimited shareholders, entities and non‑U.S. investors are welcome.
• Multiple classes of stock, you can issue preferred and common, set liquidation preferences, dividends, and control rights that match investor terms.
• Cleaner path to public markets and secondary liquidity compared with pass‑through entities.

Retained earnings and the federal rate

A C corporation pays tax at 21% on taxable income under Section 11 and files Form 1120 each year. If you plan to retain profits for growth rather than distribute cash, the single corporate‑level tax may be acceptable. Dividends add a second layer, so build that into your model. (law.cornell.edu)

Benefits, payroll, and equity

C corps can offer a wider range of fringe benefits that are deductible at the corporate level, subject to the usual benefit plan rules. They also support standard option plans and preferred equity, which helps with talent and fundraising. Your accounting team will likely run accrual accounting, keep GAAP financials for diligence, and track equity compensation carefully.

C corporation tradeoffs

The two biggest tradeoffs, double taxation on distributed profits and higher compliance overhead.

• Double taxation risk, first at the corporation, then again to shareholders on dividends. Plan your dividend policy, salaries, and option exercises with your tax advisor. (irs.gov)
• Formalities and filings, bylaws, board minutes, annual reports, and possible consolidated reporting if you own subsidiaries.
• Potentially higher administrative time if you must use accrual and maintain audit‑ready records.

Side‑by‑side comparison

Summary table

Category	S corporation	C corporation
Federal return	Form 1120‑S, pass‑through to K‑1, owners may file Form 7203 for basis	Form 1120, entity level tax at 21%
Owner limits	Up to 100, U.S. individuals and certain trusts only	No federal limit, entities and non‑U.S. investors allowed
Stock classes	One economic class, voting differences allowed	Multiple classes, preferred and common
Compensation	Reasonable salary required for owner‑employees	Market pay expected, no special rule like S corps
Typical use case	Closely held businesses planning distributions	Venture‑backed or growth companies retaining earnings

Sources, IRS 1120‑S and 1120 pages, S corp compensation page, and Section 11. (irs.gov)

How to become a C corporation

• Choose a state and file Articles of Incorporation, adopt bylaws, appoint directors and officers, and issue shares.
• Obtain an EIN, set up payroll and state tax accounts, and open business banking.
• File Form 1120 each year and keep proper books and minutes. The Instructions for Form 1120 explain who must file and general rules for domestic corporations.

Practical tip, schedule your first board meeting within two weeks of formation to ratify incorporator actions, approve bylaws, adopt equity plans, and document the initial stock issuances.

How to become an S corporation

You either form a corporation under state law or start as an LLC, then elect corporate tax treatment, and then you make the S election if you qualify. The sequence matters.

The election and the deadline

• File Form 2553, signed by all shareholders, no later than 2 months and 15 days after the start of the tax year you want S status, or at any time in the prior tax year. Community property rules may require a spouse’s consent in some cases, see the 2553 instructions. (irs.gov)
• Missed it, the IRS provides late election relief if you qualify and you have been filing as if you were an S corp. See the IRS Late Election Relief page which references Rev. Proc. 2013‑30.

Eligibility checkpoints

• Confirm owner count and eligibility, watch for trusts, estates, or nonresident transfers.
• Confirm one economic class of stock. Check your charter, bylaws, side agreements, convertible notes, warrants, and SAFEs for hidden preferences. The regulation focuses on identical rights to distributions and liquidation proceeds.
• Keep shareholder affidavits current so you can prove eligibility before filing your 2553.

Many accidental terminations come from a well‑meaning transfer to an ineligible holder. Build a simple pre‑transfer approval step into your shareholder agreement and you will save hours of cleanup later.

After the election

• Run payroll for owner‑employees at a reasonable salary and keep evidence for your figure. The IRS explains its factors and enforcement posture in its S corporation compensation guidance.
• Close the books monthly, issue clean K‑1s on time, and maintain shareholder basis records, often using Form 7203.
• Watch 199A thresholds each year, for 2025 the threshold amounts are $394,600 joint and $197,300 for most others, with phase‑ins up to $494,600 and $247,300.

When S beats C, and when it does not

S corp wins when

• You expect to distribute most profits rather than retain them, pass‑through treatment avoids the corporate layer. (irs.gov)
• You want potential 199A benefits and you fall under the 2025 thresholds. (irs.gov)
• Your cap table will stay tight and domestic, and you do not need preferred stock.

C corp wins when

• You plan to raise from VCs, PEs, or corporate investors who expect preferred stock and no owner eligibility limits.
• You plan to retain earnings for growth and can live with the 21% corporate rate while deferring dividends.
• You want the cleanest path to broad equity programs, complex preferences, or public‑company preparation.

Decision checklist you can complete in under 10 minutes

• Will you need preferred stock or foreign or entity investors in the next 18 months, choose C.
• Will you distribute most profits over the next two years and keep ownership under 100 eligible U.S. owners, consider S.
• Are your taxable incomes near the 199A thresholds in 2025, run projections with and without the deduction.
• Do you have time and budget for payroll documentation and basis tracking, if yes, S is manageable, if no, reconsider.

If you run a CPA or accounting firm with a busy season already packed, Accountably’s offshore teams can prep 2553 packages, basis worksheets, and payroll files inside your process. You keep client control, we cover the heavy lift behind the scenes, aligned to U.S. standards.

FAQs

Is my LLC an S or C corp right now

You are neither until you make elections. An LLC can elect to be taxed as a corporation, then file Form 2553 to become an S corporation if eligible. Without those elections, you are a default partnership or disregarded entity. Check for filed Forms 8832 or 2553. (irs.gov)

How do I tell if a corporation is S or C

Look at the last filed federal return, Form 1120 means C corporation, Form 1120‑S means S corporation. You can also ask for a copy of the accepted Form 2553 to confirm the S election.

Why is it called a C corporation

The corporate rules live in Subchapter C of the Internal Revenue Code, including Section 11 which sets the 21 percent rate. The label simply points to the part of the Code that applies.

Do S corp owners really need a salary

Yes, if you perform services you must pay reasonable compensation before taking distributions. The IRS can reclassify underpaid distributions as wages, and courts have supported that authority. Document your role and market pay.

What if I missed the S election deadline

Relief exists. If you qualify and have been acting like an S corp, you can request late election relief under Rev. Proc. 2013‑30 through the IRS Late Election Relief process.

Light CTA for firms and founders

If you handle this in house, bookmark the IRS pages I cited and build a one‑page calendar for 1120 or 1120‑S deadlines. If you are a CPA, EA, or firm owner who needs extra hands, Accountably partners with firms to deliver white‑label back‑office support that follows U.S. compliance standards. Use us to scale during busy season, then shift back to your team when the rush slows.

Conclusion

You do not need to love the Internal Revenue Code to make a solid choice. If you want investor flexibility and multiple stock classes, C corp fits. If you want pass‑through treatment and plan to keep your cap table simple, S corp can be a smart move. Set your direction, check the 2025 thresholds and deadlines, and document the basics, payroll, basis, minutes, and you will sleep better at tax time.

Final reminder, this guide reflects rules available on October 7, 2025. Always confirm the latest IRS forms, instructions, and inflation adjustments before you file.