Compliance & tax
C corp vs S corp vs LLC
The fundamental US entity-classification choice. Federal tax treatment, owner restrictions, and capital-raising flexibility differ significantly across the three.
Definition
C corp vs S corp vs LLC is the fundamental US entity-classification choice every new business faces. The three differ in their federal tax treatment, owner-eligibility restrictions, ability to raise outside capital, complexity of administration, and exit-tax outcomes. Each is appropriate in different contexts. For US-incorporated businesses, the choice has material long-term implications and is typically made early — though entity conversions (S to C, C to S, LLC to C) are possible later, often via F reorganization.
Same concept, different references
| US (IRC) | Subchapter C — C corporation taxation |
|---|---|
| US (IRC) | Subchapter S — S corporation pass-through |
| US (IRC) | Subchapter K — Partnership/LLC pass-through |
| State law | Entity formation under each state's corporation or LLC code |
The federal tax treatment, summarized
Three distinct tax regimes:
- C corp: pays federal income tax at 21% on corporate profits. Distributions to shareholders are taxed again as qualified dividends (up to 20%) or ordinary dividends. Classic double taxation
- S corp: pass-through. No corporate-level federal tax. Income flows to shareholders' personal returns, taxed at individual rates. W-2 wages to shareholder-employees plus pass-through profit
- LLC (default): taxed as partnership (multi-member) or disregarded entity (single-member). Pass-through. No corporate-level tax. LLC member income may include self-employment tax. LLCs can also elect to be taxed as C corp or S corp
When each is preferred
Different entity types fit different business stages:
- VC-backed startups: C corp is the default. Required by most VC term sheets. Enables QSBS § 1202 exclusion. Preferred shares with different liquidation preferences are easy (multiple classes of stock permitted)
- Closely-held service businesses: S corp common. Pass-through avoids double tax. W-2 wages let shareholders contribute to Social Security
- Real estate, holding entities: LLC dominant. Pass-through tax. Maximum flexibility for capital structure
- International operations: C corp often preferred for US tax-treaty access; LLCs and S corps can be transparent under treaty rules in some jurisdictions
- Conversion paths: many startups begin as LLCs and convert to C corps (F reorg) before raising institutional capital
Restrictions and tradeoffs
Each form has eligibility constraints that shape the choice:
- S corp restrictions: 100 shareholders max, US persons only, single class of stock, domestic only. Cannot accept foreign or corporate investors
- C corp tradeoffs: double taxation; flexible ownership; QSBS eligibility; preferred for IPO path
- LLC complexity: K-1 reporting can be cumbersome; self-employment tax may apply; complex multi-class structures require careful partnership agreements
In Octelligence
Different entities, same records.
Octelligence supports C corps, S corps, and LLC structures with the same underlying corporate-records framework. Each entity gets its specific records (stock ledger for corps; capital account ledger for LLCs).
For foundersUS tax structuring
Track every US tax structure at the share level.
Section 351, F reorganization, 338(h)(10), S corp election, AAA, 199A, 1244, BIG tax. Recorded against the corporation, surfaced when relevant.