What's the Difference Between an S Corporation and a C Corporation?

An S Corporation and a C Corporation are both incorporated business entities, but they're taxed very differently. A C Corporation is taxed as a separate entity at the corporate tax rate of 21%, and then shareholders pay tax again on any dividends they receive — this is known as double taxation. An S Corporation avoids double taxation by passing its income directly to shareholders, who report it on their personal tax returns. The trade-off is that S Corporations face restrictions: they can have no more than 100 shareholders, all shareholders must be U.S. citizens or residents, and only one class of stock is allowed. For small, closely held businesses, the S Corporation is often the preferred choice for its tax simplicity, while C Corporations are more common when a company plans to raise outside investment or eventually go public.