Shareholders are part owners of a company. They hold rights, take on risks, and may receive profits, but the specifics depend on the corporate type. Before comparing S corp and C corp shareholders, here is a quick refresher on what a shareholder is and how private companies are classified.
What are shareholders?
Shareholders own shares of public or private companies and often have voting power on major matters. If the business performs well, shareholders can earn money. If it performs poorly, they can lose money.
An individual, an entity or a trust becomes a shareholder by purchasing shares. Founders and later buyers are all shareholders.
Employees at some companies may also own shares of the company’s stock as part of their benefits.
Shareholders for different entity types
Understanding benefits and risks requires a basic view of entity types.
Entity type | Owners and liability | Tax posture |
One owner, no liability shield | Income taxed to owner directly | |
Partnership | Two or more owners | Pass through to partners |
Limited liability for members | Can be taxed as pass-through or corporation | |
Corporation with pass through taxation | Shareholders report pro rata items | |
Corporation with pass-through taxation | Traditional corporation | Pays corporate tax, owners taxed on dividends |
An LLC or a C corporation can elect S corporation taxation if it meets eligibility rules.
How S corps and C corps and their shareholders are taxed
Distributions and dividends both represent profit paid to owners, but the terms and tax rules differ by entity.
At a glance:
Topic | S corporation | C corporation |
Entity return | Form 1120-S | Form 1120 |
Owner payment term | Distribution | Dividend |
Owner reporting form | Schedule K-1 | Form 1099-DIV |
Federal corporate tax | No | Yes |
Double taxation | No on operating income | Yes when dividends are paid |
How S corps and their shareholders are taxed
S corporations are pass-through entities. The company files Form 1120-S and issues a Schedule K-1 to each shareholder showing income loss deductions and credits. Distributions are generally tax free to the extent of stock basis. Amounts above basis are taxed, often as capital gain. Shareholders then report their pro rata items on individual returns. Self employment tax does not apply to S corporations pass through income.
How C corps and their shareholders are taxed
C corporations file Form 1120 and pay corporate income tax on profits. When dividends are paid to shareholders, the corporation reports them on Form 1099-DIV. Owners then pay tax on the dividends. Ordinary dividends are taxed as ordinary income. Qualified dividends are typically taxed at capital gains rates at the federal level. State rules vary. Some states tax capital gains as ordinary income while others have no state income tax on such gains.
If shareholders sell shares at a profit, federal and applicable state capital gains tax may apply based on the holding period.
Double taxation explained
Double taxation refers to profits taxed at the corporate level and taxed again when distributed as dividends to shareholders. This applies to many C corporations. S corporation operating income typically avoids double taxation because it passes through to owners once, although distributions above basis can still be taxed.
Simple illustration:
Item | S corporation | C corporation |
Sales | 100,000 | 100,000 |
Owner salary | 60,000 | 60,000 |
Profit after salary | 40,000 | 40,000 |
Entity level tax on profit | None | Corporate income tax applies |
Owner cash from profit | Distribution reported on K-1 | Dividend reported on 1099-DIV |
Payroll tax on profit payout | None | None |
Additional tax on owner | Only if above basis or via personal rates | Dividend taxes at owner level |
Tax rate note
C corporations pay a 21% federal corporate tax rate. S corporation owners are taxed at individual rates on their pass-through items and may qualify for the 20% qualified business income deduction if eligible.
Ownership and stock S corp vs. C corp shareholder
Ownership rules differ and can influence fundraising plans.
Feature | S corporation | C corporation |
Number of shareholders | Up to 100 | Unlimited |
Eligible owners | US citizens and residents, certain estates and trusts | Individuals, entities, funds, non US owners allowed |
Classes of stock | One class allowed with voting and nonvoting permitted | Multiple classes allowed |
Investor fit | Best for closely held businesses | Suited for venture funding and public markets |
Similarities between S corp and C corp shareholders
Limited liability protection Owners are generally not personally responsible for corporate debts.
Corporate governance Both typically have a board of directors and file annual reports. Some S corporations created from LLCs may have alternative governance under state law.
FAQs
Are S corporation distributions the same as dividends?
No. S corporation profit payouts are called distributions. Dividends refer to C corporation payouts.
Can an S corporation pay dividends?
Only in narrow cases where there are retained C corporation earnings from a prior C corporation period. Those payouts are taxed like C corporation dividends.
Do S corporation shareholders pay self employment tax on pass through income?
No. Self employment tax generally applies only to wages paid to shareholder employees, not to pass through income.
Who receives a Schedule K-1 and who receives a Form 1099-DIV?
S corporation shareholders receive Schedule K-1. C corporation shareholders who are paid dividends receive Form 1099-DIV.
Which structure is better for investors?
C corporations provide unlimited owners multiple stock classes and simpler investor participation. S corporations limit the number and type of owners and allow only one class of stock.
