🏛 S Corporation vs. C Corporation: What Ohio Small Business Owners Need to Know

One of the most common points of confusion among entrepreneurs is the difference between a C Corporation and an S Corporation. These aren’t separate legal entities — both are corporations under state law — but they differ in how they are taxed under the IRS code. The “S” or “C” designation refers to the subchapter of the Internal Revenue Codeunder which the business elects to be taxed.

Here’s what you need to understand before choosing either one:

🔵 C Corporation (Default Tax Status)

When you form a corporation — unless you specifically elect otherwise — the IRS treats it as a C Corporation by default.

✅ Pros:

• No restrictions on shareholders — can have unlimited shareholders, including foreign entities
• Easier to raise venture capital and issue multiple classes of stock
• Separate tax entity — owners only pay taxes on dividends, not profits left in the company
• Perpetual existence, regardless of ownership changes

❌ Cons:

• Double taxation — the corporation pays taxes on its profits, and shareholders also pay personal tax on dividends
• More formalities — must have a board of directors, maintain minutes, and hold regular meetings

💡 Best for:

• Startups planning to raise funds from outside investors
• Businesses reinvesting profits for growth
• Corporations seeking long-term equity financing

🟢 S Corporation (Tax Election for Pass-Through)

An S Corporation is a tax election you can make after forming either a corporation or an LLC (if you meet the criteria). It allows income to pass through directly to the shareholders, avoiding double taxation.

✅ Pros:

• Pass-through taxation — profits are only taxed at the shareholder level
• Avoids self-employment taxes on distributions (owners can pay themselves a “reasonable salary” and take additional income as dividends)
• Still offers liability protection

❌ Cons:

• Limits on shareholders — must have 100 or fewer, all must be U.S. citizens or residents
• One class of stock only
• More IRS scrutiny around reasonable compensation and profit distributions

💡 Best for:

• Profitable businesses with owners actively working in the business
• Service-based businesses with low reinvestment needs
• LLCs that want S-Corp tax benefits while maintaining flexible structure

⚖️ Key Differences at a Glance

📝 What We Recommend

At Dresden Tax & Business, we generally find that:

• C-Corps make sense for high-growth companies with a long-term goal of raising capital or selling equity
• S-Corps are often ideal for profitable, owner-operated businesses looking to reduce their self-employment tax burden

But it’s not always cut and dry — your industry, revenue, number of owners, and future plans all play a role.

🎯 Final Word: Let’s Make the Right Call Together

If you’re unsure which structure is best, don’t guess. A brief consultation with our team can save you thousands in taxes and legal headaches later. We’ll review your goals, financial picture, and risk tolerance to help you choose the right fit — and we’ll even handle the paperwork.

📅 Book your entity selection consultation with Dresden Tax & Business today — and let’s make your foundation rock-solid.