S Corp vs C Corp: Which One Makes Sense for Startup Founders?

Choosing your business structure affects taxes, investors, and your exit. Most founders land on one of two paths. S Corporation or C Corporation. This guide explains both in plain English so you can make a smart call fast.

If you are not sure, read the details below. Then decide based on funding, ownership, and taxes.

 

What Is a C Corp

A C Corporation is a separate legal entity. It pays its own corporate taxes. Owners hold shares. You can have unlimited shareholders, multiple classes of stock, and investors from anywhere in the world. Most VC-backed startups use a Delaware C Corp.

Why founders pick it

• Easy to raise money from angels and VCs.
• Can issue preferred stock and common stock.
• Flexible equity plans and option pools.
• Potential QSBS tax benefit on a future sale if you qualify.

Tradeoffs

• Double taxation if you pay dividends.
• More formal paperwork and ongoing compliance.
• Payroll, board minutes, and state filings to keep up with.

 

What Is an S Corp

An S Corporation is a tax status with the IRS. It turns your company into a pass-through for federal tax. Profits pass to owners. You still run a corporation or an LLC that elected S status.

Why founders pick it

• Avoids corporate income tax in most cases.
• You pay yourself a “reasonable salary.” Extra profit may be taken as distributions. Those are not subject to self-employment tax.
• Simple cap table when you have one or a few owners.

Limits you must know

• Max 100 shareholders.
• Shareholders must be U.S. individuals or certain trusts. No partnerships or corporations. No nonresident aliens.
• Only one class of stock. That blocks preferred shares. This is why VCs avoid S Corps.

 

Taxes: How They Actually Work

C Corp taxes

• The company pays corporate income tax on profit.
• If the company pays dividends, owners pay tax again.
• You can keep profits in the company to reinvest.
• Potential QSBS benefit on a sale if you hold qualified stock for 5 years. This can be a major tax win for founders who qualify.

S Corp taxes

• No corporate income tax in most cases.
• Owners report business profit on their personal returns.
• You must run payroll and pay yourself a reasonable salary.
• Extra profit may be distributed and can reduce payroll tax exposure.

Simple rule of thumb

• Want investors and multiple stock classes. Choose C Corp.
• Want pass-through taxes and no VC plans. An S Corp can save money.

 

Ownership and Fundraising

C Corp

• Unlimited shareholders.
• Preferred and common stock.
• Stock option plans for hires.
• Clean for priced rounds and SAFEs.

S Corp

• One class of stock.
• No preferred shares.
• Hard to take VC money.
• Best for small teams and bootstrapped growth.

 

Founder Payroll and Distributions

In an S Corp

• You must run payroll for any founder doing work.
• Pay a reasonable salary based on market rates.
• Extra profit can be taken as distributions.
• This can lower overall employment taxes.

In a C Corp

• You also run payroll.
• Profit stays in the company unless you pay dividends or bonuses.
• Many startups reinvest profits into growth rather than distributions.

 

Which One Should You Choose: S Corp or C Corp?

Choose S Corp if

• You are a service-based founder. Example: marketing, dev shop, consulting.
• You do not plan to raise VC.
• You want pass-through taxes and potential payroll tax savings.
• You have a small number of U.S. owners.

Choose C Corp if

• You plan to raise from angels or VCs.
• You want preferred shares and an option pool.
• You want to qualify for QSBS on a future exit if possible.
• You may have foreign investors or many shareholders.

 

Using Swyft Filings for Setup

If you want to skip the paperwork and focus on building, services like Swyft Filings can form your corporation and handle S Corp elections for you.

• S Corp Service: Swyft Filings prepares your Articles of Incorporation or LLC paperwork and files the IRS Form 2553 to elect S Corp status. This ensures your business is taxed as an S Corp from the start.

Swift Fillings S Corp

• C Corp Service: Swyft Filings sets up your C Corporation in any state, handles the bylaws, and keeps you compliant with state requirements. They also provide registered agent services to keep you in good standing.

This saves you from navigating IRS forms and state filings on your own.

 

How Founders Often Start

Path A: Start lean, then go big

• Begin as an LLC taxed as an S Corp once profit justifies payroll.
• Convert to a Delaware C Corp when you raise outside money.
• Clean up the cap table and adopt the stock plan before the round.

Path B: Go C Corp from day one

• If you know you will raise money, start as a Delaware C Corp.
• Adopt bylaws, issue founder stock, and set the option pool.
• Handle 83(b) elections within 30 days of stock issuance.

 

Compliance To Keep You Out of Trouble

• Adopt bylaws or an operating agreement right away.
• Issue founder stock and collect signed IP assignment agreements.
• File 83(b) elections on time if you receive restricted stock.
• Keep board and shareholder consents in your records.
• Run payroll correctly and file returns.
• Calendar state reports and franchise taxes.

 

How To Switch Later

• You can convert an LLC to a C Corp when funding is real.
• You can revoke an S election if you outgrow it and need C Corp status.
• Plan the change with your lawyer and CPA to avoid tax surprises.

 

Final Thoughts

Pick C Corp if you want investors, stock option plans, and a big exit path. Pick an S Corp if you want tax efficiency for a lean team and do not need preferred stock or foreign owners. Set up clean records, run payroll correctly, and work with a CPA for taxes. The right choice today saves money, speeds up funding, and makes your exit easier later.