S-Corp vs. C-Corp Structures?

August 21, 2025

by a searcher from Instituto Tecnológico de Buenos Aires in United States

I understand at a high level that S corps are more tax efficient because of the pass through structure, while C corps often face double taxation. What I’m trying to wrap my head around is the practical reasoning when searchers or operators choose a C corp despite the heavier tax burden If, for example, you know you’ll be paying more in taxes, how does it actually make sense in the long run to start or switch into a C corp? Is the trade off purely about making room for private equity down the line? Does the credibility with lenders or the ability to bring in more flexible capital really outweigh the tax inefficiencies in practice? How did you think through the cost of extra taxes versus the benefits of opening the door to bigger investors, and in hindsight, do you feel it was the right call?

3 Likes

43 Replies

660 Views

Replies

Reply by a searcher
from Stanford University in Healdsburg, CA 95448, USA

S corp is the most common, and gets pass through treatment like a LLC. C corp can have benefits in access to QSB stock treatment, but otherwise the main reason to chose a C corp would be to accommodate a larger number of shareholders or multiple classes of stock. Tax wise, you can retain earnings in the C corp at an advantaged rate compared to income tax rates (if you want to do that) and there are some planning options C corps present for rapid scaling scenarios or different exit scenarios. Be aware that if an exit scenario evolves that would require a different form of corporation you can always convert it. I don't think a corporate form election would create more or less credibility unless it's presented with a structure that clearly doesn't fit the corporate capabilities (ie. S corp with preferred shares) in which case someone who knows what they're doing will recognize a lack of sophistication. BUT - everyone and every situation is different and can have nuance that doesn't fit generalities so always engage a competent tax professional to address your actual situation. If these kinds of things go wrong they go very expensively wrong so it makes sense to invest in solid advice.

Reply by an investor
from Wright State University in Bellefontaine, OH 43311, USA

S-Corps can be great but also have a lot of pitfalls (easier to bust your s-election than you think). That being said in the ETA world one of the reasons you do not see a lot of S-Corps is that an S-Corp cannot have another entity as a shareholder. This means that a fund, partnership, retirement account etc cannot be an investor in your raise. Sometime this means they end up as partnerships and sometimes it is a C-Corp. While they may not be as tax efficient they still allow the deal to happen. Some other reasons you may see people take the C-Corp route. - QSBS - Higher EBITA that they plan to reinvest instead of distributing with a goal of a stock sale in the end. This means you only have a 21% tax rate vs a potentially 37% rate at the individual level which allows compounding to happen faster. - setup for private equity or venture investment There are some others as well but really comes down to what are you goals and what are the factors in the business.

+41 more replies.

Join the discussion