C-Corp vs. pass-through taxation: key decisions
A C corporation pays its own federal income tax. Pass-through business income generally reaches the owners’ returns. Compare the full lifecycle, including distributions and an eventual sale.
Tax at the corporate and shareholder levels
A C corporation generally pays federal income tax at 21%, plus applicable state taxes. Dividends paid from after-tax earnings may then be taxable to shareholders. The corporate rate alone does not show the combined cost.
Pass-through income can create a tax bill without cash
S corporations and partnerships generally allocate income to owners each year, even if they retain the cash. Certain entity-level taxes can still apply. Plan how owners will fund the resulting personal tax obligations.
Consider investors and ownership plans
An S corporation has shareholder and stock restrictions. A C corporation may fit a business that needs ownership or financing arrangements that an S election cannot accommodate. An LLC’s legal flexibility is distinct from its tax classification.
Model wages, benefits and deductions
Owner wages, fringe benefits, the qualified business income deduction and loss limitations differ across structures. The QBI deduction can be available to eligible pass-through owners; C corporations do not claim it. No entity choice guarantees a lower overall tax bill.
Do not overlook retained earnings and the exit
Retaining profit in a C corporation can postpone shareholder-level dividend tax, but accumulated-earnings and personal-holding-company rules may matter. A stock sale, asset sale, liquidation or conversion can produce very different outcomes.
Choose using a complete forecast
Compare several years of expected earnings, owner withdrawals, reinvestment, state taxes and the likely exit. Review legal requirements and financing needs alongside the tax model.
Sources and further reading
Reviewed September 15, 2026. General information; your facts and tax year determine the treatment.
Have a question about this?
Your first consultation is free. Call the Boca Raton office or book online.
Free Consultation →