The corporation type you choose decides your tax bill, your personal liability, and whether investors will fund you. Choose wrong and you can pay federal tax twice on the same profit, forfeit your limited liability protection, or lock venture capital out of your cap table.
This guide covers the C corporation, S corporation, limited liability company (LLC), nonprofit corporation, benefit corporation, professional corporation, and close corporation. The comparison table below ranks them by how they are taxed, who can own them, and what each one is best for.
What Is a Corporation?
A corporation is a legal entity separate from its owners that shields shareholders’ personal assets behind a corporate veil. Shareholders are generally not liable for company debts. The company survives ownership changes. It can raise money by issuing stock. The U.S. Small Business Administration (SBA) treats the corporation as one of the core business structures.
Corporations share five traits: limited liability, perpetual existence, a separate legal identity, centralized management under a board, and the ability to raise capital through stock. One point trips up most founders. C corp and S corp are Internal Revenue Service (IRS) tax classifications layered on a state-formed corporation, not separate state entity types. An LLC is a distinct entity type people compare against corporations, covered below.
How Do the Different Types of Corporations Compare?
A C corporation suits companies raising venture capital, an S corporation or LLC suits small owner-operated businesses, and a nonprofit suits mission-driven organizations. The table below compares each structure by taxation, ownership limits, liability protection, and best use, with a named source for every tax rule.
| Structure | Taxation | Ownership limits | Liability protection | Best for | Source |
|---|---|---|---|---|---|
| C corporation | Entity pays flat 21% federal tax; dividends taxed again | Unlimited shareholders, foreign owners allowed, multiple stock classes | Yes | Venture-backed and IPO-track companies | IRS Publication 542 |
| S corporation | Pass-through; no entity-level federal tax | Max 100 shareholders, US persons only, one class of stock | Yes | Profitable small firms cutting self-employment tax | IRS, S corporations |
| LLC | Pass-through by default; can elect C or S corp tax | Unlimited members, individuals or entities | Yes | Solo owners and small partnerships wanting flexibility | SBA business structure guide |
| Nonprofit corporation | Tax-exempt only after IRS 501(c)(3) recognition | No shareholders; no profit distribution | Yes | Charitable, educational, religious, scientific missions | IRS, 501(c)(3) rules |
| Benefit corporation | Taxed as a C corp at 21% | Same as a C corp | Yes | For-profit companies with a public-benefit mandate | SBA business structure guide |
| Professional corporation (PC / PLLC) | C or S corp tax by election | Licensed professionals only | Yes, except personal malpractice | Doctors, lawyers, accountants | SBA business structure guide |
| Close corporation | Usually C or S corp tax | Limited shareholders, no public trading | Yes | Family-owned, privately held businesses | SBA business structure guide |
What Is a C Corporation?
A C corporation (C corp) is the default tax status of a state-formed corporation. The entity pays a flat 21% federal income tax on profits, then shareholders pay tax again on dividends. C corps allow unlimited shareholders and multiple stock classes. They also permit foreign owners. They can go public through an initial public offering (IPO).
This two-layer structure is called double taxation. The corporation pays 21% on profits, per IRS Publication 542. Distributed profits are taxed again as qualified dividends at 0%, 15%, or 20%, per IRS Topic No. 409. Retained earnings escape the second layer until the company distributes them. The flat 21% rate replaced a graduated schedule that topped out at 35%, under the Tax Cuts and Jobs Act (TCJA), Public Law 115-97, enacted December 22, 2017.
What Is an S Corporation?
An S corporation (S corp) is a tax election filed on IRS Form 2553, not a separate entity type. Profits pass through to shareholders’ personal returns with no entity-level federal tax, per the IRS S corporations guidance. Eligibility is strict on shareholder count, shareholder type, and stock class.
| Eligibility rule | Requirement | Source |
|---|---|---|
| Shareholder cap | No more than 100 (a family within 6 generations of a common ancestor counts as one) | IRS, S corporations; IRC §1361(c)(1) |
| Eligible shareholders | Individuals, certain trusts, and estates; not partnerships, corporations, or nonresident aliens | IRS, S corporations |
| Entity type | Domestic corporation only; ineligible corporations (some banks, insurers, DISCs) excluded | IRS Form 2553 instructions |
| Stock classes | One class of stock; voting-rights differences allowed | IRS Form 2553 instructions |
| Election deadline | File Form 2553 within 2 months and 15 days of the tax year start (about March 15 for calendar-year filers) | IRS Form 2553 instructions |
| Late-election relief | Available within 3 years and 75 days of the effective date with reasonable cause | IRS Form 2553 instructions |
S corp owner-employees split income between a salary subject to payroll tax and distributions that are not. The IRS scrutinizes whether that salary is reasonable, so lowballing it invites an audit. See the Form 2553 instructions for the full election rules.
C Corporation vs S Corporation: What’s the Difference?
A C corporation pays entity-level tax and welcomes unlimited, foreign, and institutional shareholders. An S corporation passes income straight to owners but caps ownership at 100 US persons with one class of stock. The C corp fits fundraising, and the S corp fits tax savings for profitable small firms.
| Factor | C corporation | S corporation | Source |
|---|---|---|---|
| Entity-level tax | Flat 21% | None (pass-through) | IRS Publication 542 / IRS S corporations |
| Shareholder limit | Unlimited | Maximum 100 | IRS, S corporations |
| Foreign owners | Permitted | Nonresident aliens excluded | IRS Form 2553 instructions |
| Stock classes | Multiple | One | IRS Form 2553 instructions |
Is an LLC a Corporation?
No, a limited liability company (LLC) is a legally distinct entity type, not a corporation. It belongs in this comparison because founders weigh it against corporations for the same decision. An LLC delivers limited liability protection. It carries fewer formalities than a corporation. It offers flexible tax treatment.
By default a single-member LLC is a disregarded entity and a multi-member LLC is taxed as a partnership, but an LLC can elect C corp or S corp taxation. Ownership is held through membership interests, not stock. Most states require no mandatory board or annual meetings, which cuts the governance burden.
What Is a Nonprofit Corporation?
A nonprofit corporation is a state-formed corporation with a charitable, educational, religious, or scientific purpose, no shareholders, and no profit distribution. State incorporation and federal tax exemption are two separate steps. A nonprofit is not automatically tax-exempt; it must apply for and receive IRS recognition.
Federal exemption comes only after the IRS approves the application under Section 501(c)(3). A board governs the organization, and any surplus is reinvested in the mission rather than paid out to individuals. Nonprofits can also raise money through grants and public and private donations, a funding route closed to for-profit entities.
What Is a Benefit Corporation (B Corp)?
A benefit corporation is a state legal status that requires the company to pursue a public benefit alongside profit, and it is taxed as a normal C corp at 21%. It is not the same as a Certified B Corp. A Certified B Corp holds a private certification from the nonprofit B Lab, which is legally distinct from benefit corporation status.
What Other Corporation Types Exist?
Three more forms round out the list: the professional corporation, the close corporation, and the cooperative. Each serves a narrow use.
Professional Corporation (PC and PLLC)
A professional corporation (PC), or professional limited liability company (PLLC), is for licensed professionals such as doctors, lawyers, and accountants. The liability shield covers business debts. It does not cover a professional’s own malpractice.
Close Corporation
A close corporation is privately held by a limited number of shareholders, does not trade publicly, and operates with relaxed formalities. Exact shareholder caps vary by state statute.
Cooperative
A cooperative is owned and operated for the benefit of its members, who share in its earnings. Members typically vote on major decisions.
How Does Pass-Through Taxation Work?
Pass-through taxation means profits skip entity-level federal tax and land on the owners’ personal returns. It applies to S corporations, LLCs, and partnerships. The Tax Cuts and Jobs Act of 2017 added a Section 199A qualified business income (QBI) deduction of up to 20% for pass-through income, which narrowed the gap with the 21% C corp rate.
Which Corporation Type Is Best for a Small Business?
Most small owner-operated businesses choose an LLC for its flexibility and low formality. Once profits grow, many add an S corp election to cut self-employment tax on distributions. The LLC gives liability protection without mandatory boards or annual meetings in most states, which keeps admin light.
Which Corporation Type Is Best for Startup Fundraising?
A Delaware C corporation is the standard for venture-backed startups. Venture capital funds avoid S corps because of the 100 US-person shareholder cap and single stock class, and they avoid LLCs because K-1 pass-through income and the lack of standard stock options complicate fund accounting. Founders form or convert to a C corp before institutional rounds.
Which Corporation Type Works for Foreign Founders?
A C corporation works for foreign founders because S corps exclude nonresident alien shareholders while C corps permit foreign owners, per the IRS. A Delaware C corporation is the standard vehicle for non-US founders and overseas investors raising capital in the United States.
What Is the Incorporation Process?
Incorporation means filing formation documents with a state and then meeting ongoing compliance duties. The steps below run from choosing an entity type to filing an S corp election and annual reports.
| Step | Action | Source / note |
|---|---|---|
| 1 | Choose your entity type and formation state | SBA business structure guide |
| 2 | Pick a name that meets state naming rules | SBA business structure guide |
| 3 | Appoint a registered agent | SBA business structure guide |
| 4 | File Articles of Incorporation (Certificate of Formation for an LLC) with the state fee | SBA business structure guide |
| 5 | Draft bylaws or an operating agreement | SBA business structure guide |
| 6 | Appoint the board and issue stock | SBA business structure guide |
| 7 | Obtain an Employer Identification Number (EIN) from the IRS | IRS |
| 8 | File Form 2553 if electing S corp status | IRS Form 2553 instructions |
| 9 | Meet annual report and record-keeping duties | SBA business structure guide |
How Commenda Helps You Incorporate
Commenda handles entity formation and then keeps the entity compliant, so filings never live in a spreadsheet. Its entity management platform tracks registered agent duties, annual reports, and statutory filings across every jurisdiction you operate in.
Check a name before you file with the Commenda company name checker, and keep every deadline in view with the compliance calendar. Weighing a new entity against a contractor arrangement abroad? The entity vs EOR (employer of record) calculator runs the numbers.
Book a demo to get a structure recommendation matched to your specific ownership and fundraising plans.
