Learn more about S and C Corporations from The Business Hatchery of Dallas, TX. To learn more about our services, give us a call today at 972-371-9594  .



Seeing your small business start to succeed and grow into a well-established company is a dream come true for entrepreneurs. But as your company grows, your tax rate tends to grow too. Growing companies face a variety of complexities during tax season, so when your company starts growing, you may want to consider forming an S Corporation, otherwise known as an S Corp. The S Corp is a business entity that offers significant tax advantages while still preserving your ownership flexibility.


Unlike traditional C Corporations, also called C Corps, the S Corporation is not subject to corporate income taxes. Instead, the S Corporation receives different treatment for tax purposes that is generally more favorable to the business owner. The S Corp is a pass-through entity for tax purposes, similar to the LLC. This means that the income generated by an S Corporation will flow through to the personal income tax returns of the shareholders, and the S Corp itself generally does not owe any tax liability.

Structuring your business as an S Corp also gives you flexibility for managing the company’s ownership. The stock of S Corporations is freely transferable, while the interest (ownership) of LLCs is not. This means that the shareholders of S Corporations can sell their ownership interest without obtaining the approval of the other shareholders.

Another area of concern for business owners is reducing their liability for self-employment taxes, and an S Corporation can have an advantage over an LLC in this area as well. To visualize how much an S Corporation can save you in taxes, check out our S Corporation Tax Calculator.

The compensation (salary and bonuses) of S Corporation shareholders is subject to self-employment tax, but not the profits automatically allocated to them as a shareholder. Depending on how you pay yourself throughout the year and depending on how your income appears on your tax return, you can effectively minimize your tax burden by reducing the amount of your business profits that are subject to self-employment taxes. Talk to your accountant or professional tax advisor about the best way to structure your business earnings for tax purposes.

Although the S Corporation offers significant tax advantages and ownership flexibility, it is not the right choice for every business. There are a few restrictions as well.

Although the S Corporation offers significant tax advantages and ownership flexibility, it is not the right choice for every business. There are a few restrictions as well.

Depending on your long-term business goals – for example, if you want your company to be publicly traded or to have international shareholders, a C Corporation might be a better choice of business entity because C Corporations have no limitations on ownership and can offer multiple classes of stock. But if you are a U.S.-based business and are satisfied to work and grow within these limitations, the S Corporation can save you a lot of money and avoid many hassles as your company expands.


Tax Advantages

S Corporations are exempt from federal income tax except for certain capital gains and passive income. Similar to the LLC, the S Corporation allows profit to pass through to its shareholders, and the income is then taxed on the shareholders’ tax returns at each shareholder’s tax rates. Because the S Corporation is a pass-through entity, the corporation’s profits are only taxed once – at the shareholder level. This means that S Corporations avoid paying what is often called “double taxation” of dividends.

Asset Protection

If your business is an S Corporation, you have certain legal protections for your assets which are separate from the business’s assets. For example, shareholders are not personally liable for the company’s debts or liabilities. For the most part, creditors cannot go after the shareholders’ assets to recover business debts.

Flexible Characterization of Income

Being an owner of an S Corporation gives you flexibility in how to characterize your income for tax purposes. As the owner/shareholder of an S Corp, you can be an employee of the business and pay yourself a salary. In addition to your salary, you can also pay yourself dividends from the S Corporation or distributions that are generally tax-free or taxed at a lower rate than the employee’s salary. This helps you reduce your self-employment tax liability as long as you are characterizing your salary and dividends/distributions reasonably. The IRS does not want to see you paying yourself an artificially low salary to avoid paying self-employment taxes on the “dividend/distribution” portion of your income.

Easy Transfer of Ownership

S Corporation ownership interests are easily transferred to other owners without causing significant tax consequences or terminating the corporate entity. An ownership transfer of an S Corporation does not require adjustments to property basis or compliance with complicated accounting rules.


Restrictions on Ownership

S Corporations do not have the same degree of flexibility in their ownership structure as a C Corporations. S Corps can only offer one class of stock, which limits the appeal to different types of investors. Also, the S Corp can only have 100 shareholders (or fewer) and cannot be owned by foreign shareholders or by certain trusts or other corporate entities.

Caution about Wages and Dividends

One of the significant aspects of the S Corporation is its flexibility in characterizing income as wages or dividends, but this can also present challenges. The IRS is always on the lookout for business owners that are not fairly or accurately characterizing their payments of wages, so as an S Corporation owner, you have the risk of being asked to re-characterize some of your income and pay higher taxes as a result.

Tax Qualification Mistakes

This is a rare scenario, but it does happen – sometimes, S Corp owners will make mistakes related to their IRS form filing requirements related to stock ownership, election, consent, notification, and other aspects of running an S Corp, and this can cause the company to lose its S Corporation status.


According to the IRS, to qualify for S Corporation status, a business must meet these requirements:

  • Be a domestic corporation.
  • Have only allowable shareholders – which may include individuals, certain trusts, and estates, but not partnerships, corporations, or nonresident alien shareholders
  • Have only one class of stock
  • Not be an ineligible corporation (i.e., certain financial institutions, insurance companies, and domestic and international sales corporations.
  • The corporation must also submit Form 2553 to elect S Corporation status for tax purposes.


A C Corporation is one of several ways to legally recognize a business for tax, regulatory, and official reasons. A C Corp is simply a way to structure ownership of a business. It contrasts with other famous business structures, including Limited Liability Companies (LLCs), S Corporations, Sole Proprietorships, and others.

The majority of larger businesses in the United States are structured as C Corporations, although a C Corp could, theoretically, consist of just one person. The information below will help you decide if a C Corporation structure suits your business.

Generally, a C Corporation structure is better for larger businesses.

This is particularly true if they intend to trade shares through an Initial Public Offering or IPO publicly. A C Corporation is much more attractive to potential investors, including venture capitalists and shareholders, because it allows wider corporation ownership.


A C Corp, a corporation, is a business entity formed and regulated on a state level. The corporation is formed by filing “Articles of Incorporation” with the Secretary of State in the state of incorporation. The policies, articles, costs, and regulations for forming a C Corp vary from state to state. Details on how to form a C Corporation can be found at the end of this article.

The corporation is the oldest form of business entity. It has long been a successful way to do business. It allows groups of individuals to pool their resources and capital to pursue a common purpose, with their risk limited solely to the amount of stock they own. Although a C Corp is a famous business structure, other options exist for forming businesses in the US.

Choosing a C Corp


  • Limited Liability
  • Exist Independently of Owners
  • Fluid Ownership
  • Ability to Rise Money Through IPO
  • Enhanced Corporate Credibility


  • Different Tax Structure
  • Double Taxation Investors
  • Extensive Legal Requirements


A C Corp has Limited Liability

Because a C Corp is a separate legal entity, the business’s liabilities are separate from the liabilities of the directors, investors, and shareholders.

A C Corp Exists Independently of its Owners

A C Corporation can have “Perpetual Existence” –unlike sole proprietorships…

Ease of Access to Funding Through Issuing Stock

If a C Corporation wants to raise money, it can hold an “Initial Public Offering (IPO)” where…

Ownership of C Corps Can Be Fluid and Transferred

Ownership in a C Corporation is decided by who holds the stocks it issues. These stocks can be…

Enhanced Business or Corporate Credibility

Most of the businesses that are household names are C Corporations. Incorporating as a C Corp…

The Disadvantages of C Corporations

  • A different tax structure to other types of businesses.
  • Double taxation for investors when dividends are paid to them.
  • Legal rules, regulations, formalities, and compliance they have to meet.

Request a free quote, get information, or ask for professional advice – call our team at 972-371-9594.