Quick answer: A C corp pays 21% federal tax on its profit, and owners pay tax again on dividends. An S corp pays no federal income tax; profit is taxed once on the owners’ returns. Most owner operated small businesses choose S corp. Companies raising venture capital usually choose C corp.
C corporations and S corporations are both corporations legally. The difference is how they are taxed, and that difference can mean thousands of dollars a year. New to the topic? Our guide to what an S corp is covers the basics.
The core difference: who pays the tax
| C corp | S corp | |
|---|---|---|
| Federal income tax | Paid by the company at 21% | Passes through to owners |
| Profit paid to owners | Dividends taxed again on owners’ returns | Distributions generally not taxed again |
| Virginia income tax | 6% corporate tax | Owners pay on personal returns |
| Owner pay | Salary and dividends | Reasonable salary plus distributions |
| Pass through (QBI) deduction | Not available | Up to 20% for eligible owners |
| Tax return | Form 1120 | Form 1120-S plus K-1s |
That second layer of tax on dividends is what people mean by double taxation. An S corporation avoids it because profit is taxed only once, on the owners’ returns.
The double tax, with a $100,000 example
The gap narrows if a C corp keeps profit in the business instead of paying dividends, since only the 21% applies until the money comes out. That is why growth companies that reinvest everything often prefer a C corp.
C corp vs S corp vs LLC at a glance
An LLC can be taxed three ways: the default (sole proprietor or partnership), as an S corp, or as a C corp.
| LLC (default) | S corp | C corp | |
|---|---|---|---|
| Layers of income tax | One | One | Two |
| Self employment or payroll tax | On all profit | Only on salary | Only on salary |
| Owner limits | None | 100 eligible owners, one class of stock | None |
| Good fit for | New and lower profit businesses | Owner operators with steady profit | Investor backed or high reinvestment companies |
Who can be an S corp
- No more than 100 shareholders
- Shareholders must be individuals, certain trusts and estates, or certain exempt organizations
- No partnerships, corporations or nonresident aliens as shareholders
- Only one class of stock
A C corporation has none of these limits, which is one reason investor backed companies choose it.
Fringe benefits and retirement
- C corp: owner employees can receive health insurance and many other benefits tax free, and the company deducts the cost
- S corp: owners with more than 2% are treated like partners for benefits. Health insurance is added to the W-2, though owners can usually deduct it on their personal return
- Retirement: in both, 401(k) contributions are based on W-2 salary, so the salary you set matters
Selling your business
- C corp stock may qualify for the qualified small business stock exclusion. For stock issued after July 4, 2025, owners can exclude part or all of the gain after holding it three to five years, up to $15 million
- S corps avoid double tax when the business sells its assets, which is how most small business sales are structured
- C corps that sell assets face corporate tax first and then tax again when proceeds go to owners
When a C corp makes sense
- You plan to raise money from investors or venture capital
- You want to keep most profit in the business to grow, taxed at the flat 21% rate
- You have shareholders who cannot own S corp stock, such as other companies or foreign investors
- You may qualify for the qualified small business stock exclusion when you eventually sell
When an S corp makes sense
- You are an owner operator who takes most of the profit out each year
- Your profit is high enough that saving self employment tax outweighs the cost of payroll
- You want one layer of tax and simpler planning
Most small service businesses in Northern Virginia that are not raising outside money end up as LLCs taxed as S corporations.
Can you switch later?
Yes, in either direction, but there are rules.
- C corp to S corp: file Form 2553. Assets that gained value as a C corp may face built in gains tax if sold within five years
- S corp to C corp: revoke the election. You generally cannot elect S status again for five years
C corp vs S corp FAQs
Is an S corp or C corp better for a small business?
For most owner operated small businesses that take profit out each year, an S corp is better because profit is taxed once. A C corp is usually better for companies raising investor money or keeping most profit in the business.
What is the C corp tax rate?
The federal corporate rate is a flat 21%. Virginia adds a 6% corporate income tax. Dividends paid to owners are then taxed again, usually at 15% or 20% federally.
Can an LLC be a C corp?
Yes. An LLC can elect to be taxed as a C corporation with Form 8832, or as an S corporation with Form 2553. It remains an LLC under state law either way.
Can a C corp become an S corp?
Yes, if it meets the S corp requirements, by filing Form 2553. Assets that grew in value while it was a C corp may face built in gains tax if sold within five years.
Do S corps or C corps get more tax deductions?
Both deduct ordinary business expenses. C corps can provide tax free fringe benefits, like health insurance, to owner employees more easily. S corp owners may get the 20% pass through deduction instead.
Which pays less tax when I sell my business?
It depends on the deal. C corp stock may qualify for the qualified small business stock exclusion, which can exclude large gains. S corps avoid double tax on asset sales, which buyers often prefer.
Choose with real numbers
We compare both options using your actual profit, owner pay and plans. See our business formation and S corp election services.
This article is general information and not tax advice for your situation. Tax rules change, so talk with a qualified professional before making decisions.
