When setting up a corporation, one important decision is whether to go with an S-Corp or a C-Corp structure. Both offer limited liability and can raise capital, but they differ in terms of ownership restrictions and taxation. S-Corps have flow-through taxation, which avoids double taxation, but they come with limitations—like a cap on the number of shareholders and requiring all shareholders to be U.S. residents. C-Corps, on the other hand, face double taxation but have more flexibility in ownership and can attract international investors.
For those who are setting up a business, how do you think they weigh these factors? Do you think tax savings with S-Corps are enough to offset the ownership restrictions, or are the broader investor opportunities with C-Corps more appealing in the long run?
When deciding between going with an S-Corp or C-Corp structure, one must carefully weigh the benefits of tax savings against broader opportunities such as raising capital and attracting investors. As mentioned, S-Corps have flow-through taxation. Basically, their income is only taxed at the shareholder level, so they are not taxed twice. This can be a huge advantage to smaller companies that want to keep profits more for the owners without corporate-level taxation. C-Corps do face double taxation, first at the corporate level on their profits and then at the shareholder level. Recently, this double taxation has improved after the passing of the Tax Cuts and Jobs Act of 2017. This reduced corporate tax to 21%. A further Tax Cuts and Jobs Act is planned for 2026 with estimated reduced taxes for about 62% of filers, 29% remaining unchanged, and only 9% increasing (1). While S-Corps hold the advantage in taxation, they have limitations on ownership. There is a maximum of 100 shareholders and all shareholders must be U.S. citizens or residents. C-Corps are much more flexible, having the ability to have unlimited shareholders and they are able to issue multiple classes of stock, allowing for easier capital raising. Overall, for those setting up a business, S-Corps offer significant tax raisings and allow the company to remain small and domestically owned. C-Corps are better for startups that may require global expansion and investment. The decision truly depends on the business's long-term goals.
1. Watson, G. (2024, October 9). Tax Calculator: How the TCJA expiration will affect you. Tax Foundation. https://taxfoundation.org/data/all/federal/tax-calculator-tcja-expiration/#:~:text=Further%2C%20we%20estimate%20making%20the,percent%20of%20filers%20in%202026.
Both structures definitely have their pros and cons, and I think the choice really comes down to the business’s growth plans and funding needs. For smaller businesses that want to remain tightly held and avoid complicated tax filings, an S-Corp makes a lot of sense. However, if the business anticipates rapid growth or plans to attract venture capital or international investors, a C-Corp might be the better option despite the double taxation. Another thing to consider is future flexibility- converting from an S-Corp to a C-Corp later is possible but can be complicated and may have tax implications. So, thinking about long-term goals early on can save a lot of headaches down the road.
