C Corp vs. S Corp at a Glance
Category C Corp S Corp
Basics
• Taxed independently from owners
• Unlimited shareholders
• Multiple stock classes
• Corporate-level taxation
• Pass-through tax treatment
• Designed for eligible shareholders
• Maximum 100 shareholders
• One class of stock
• Ownership restrictions
Advantages
• Limited liability protection
• Easier access to capital
• Perpetual existence
• Potential QSBS exclusion
• Limited liability protection
• Potential tax efficiency
• PTE election benefits
Potential Drawbacks
• Doublation taxation
• Higher administrative burden
• Shareholder restrictions
• Limited ownership flexibility
• Risk of losing S corp status
Potential Drawbacks
• Ownership is limited to eligible shareholders, which can restrict future investment opportunities.
• S corps cannot issue multiple classes of stock, limiting flexibility in ownership and capital raising.
• S corps are generally limited to 100 shareholders.
• The corporation must continuously satisfy IRS eligibility rules to maintain S corp status.
• Failure to meet S corp requirements can result in an involuntary termination of the election and C corp taxation.
• Less flexibility for distributing appreciated property. An S corp generally recognizes gain when it distributes appreciated property to a shareholder, as though the property had been sold at fair market value. That gain passes through to the shareholders and affects their stock basis, potentially creating current tax without a corresponding cash distribution. By contrast, a partnership can often distribute property without immediate recognition of gain, with the built-in gain preserved through carryover-basis rules. Exceptions may apply.
• An S corp shareholder generally can’ t deduct losses based solely on the corporation’ s recourse or nonrecourse debt; they must have sufficient stock basis or basis in a direct loan made to the corporation. Qualified nonrecourse financing may count toward their at-risk amount for certain real-estate activities, but it generally doesn’ t create stock or debt basis for deducting S corp losses.
Other Considerations
Involuntary termination of S election: An S corp’ s election can be terminated involuntarily if it ceases to meet the qualifications. Common causes include:
• Exceeding shareholder limits – Having more than 100 shareholders at any time.
• Ineligible shareholders – Issuing stock to a corporation, partnership or nonresident alien.
• Second class of stock – Creating this stock, intentionally or inadvertently, such as through disproportionate distributions or certain shareholder agreements.
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