S Corporation vs. C Corporation

The most important difference between an S Corporation and a C Corporation is how they are taxed at the federal level. A C Corporation pays income tax on its profits at the corporate rate, and shareholders pay a second layer of tax when those profits are distributed as dividends, which is why this arrangement is called double taxation. An S Corporation avoids this problem by passing its income directly to shareholders, who report it on their personal returns and pay tax at their individual rates without any corporate level tax. C Corporations have no restrictions on the number or type of shareholders and can issue multiple classes of stock, making them better suited for companies that plan to raise venture capital or eventually go public. S Corporations work best for closely held businesses where the owners are also the operators and want to minimize the total tax paid on business profits.