When you’re choosing a business entity, taxation is often one of the biggest deciding factors. For corporations, that usually comes down to a key choice: S-Corp or C-Corp. While both structures offer liability protection and formal governance, the way they’re taxed couldn’t be more different—and that difference can have a significant impact on your take-home profits, compliance, and long-term financial planning.
A C-Corporation is the default corporation type recognized by the IRS. It is a separate legal and taxable entity, meaning it pays its own income taxes. When profits are distributed to shareholders as dividends, those dividends are also taxed at the individual level—this is known as double taxation.
C-Corps are ideal for:
An S-Corporation is not a type of legal business entity, but a special tax status you elect with the IRS. It allows income (and losses) to pass through directly to the shareholders’ personal tax returns, avoiding corporate income tax. This structure avoids double taxation but comes with strict eligibility requirements.
S-Corps are ideal for:
Let’s break down the tax differences between an S-Corp and a C-Corp so you can decide which structure fits your business strategy best.
The most significant difference lies in how profits are taxed.
S-Corps are pass-through entities, which means the business itself isn’t taxed. Instead, profits (or losses) are passed directly to the shareholders’ personal tax returns. This avoids corporate-level tax entirely.
C-Corps, on the other hand, are taxed as separate legal entities. They pay corporate income tax on profits, and then shareholders pay taxes again on dividends—commonly known as double taxation.
For manufacturers reinvesting profits into growth, this distinction can shape cash flow strategy. If your company is focused on reinvesting earnings, this difference can have a big impact on cash flow strategy.
One major tax benefit available to many S-Corps is the 20% Qualified Business Income (QBI) deduction under Section 199A. This allows eligible pass-through entities to deduct up to 20% of their qualified income from taxable earnings—further reducing personal tax liability.
C-Corps don’t qualify for the QBI deduction. Their tax planning revolves more around corporate tax rate management and reinvestment.
This difference becomes especially important in industries with tight margins. For a deeper dive on unit economics and profitability, see our guide to margin analysis in manufacturing.
C-Corps currently benefit from a flat 21% federal corporate tax rate. However, when profits are distributed as dividends, individual shareholders may face additional tax (typically 15–23.8% depending on income and classification).
S-Corps bypass corporate taxes, but profits are taxed at the owners’ personal income tax rates—which can be higher depending on the individual’s bracket.
So while S-Corps avoid double taxation, they don’t always guarantee a lower total tax bill. The decision often depends on how much profit the company retains versus distributes.
If your company runs at a loss, the tax impact is very different depending on your structure.
S-Corp shareholders may be able to deduct their share of the business loss on their personal tax returns, subject to basis and passive activity limits. This can be a valuable tax shield in early-stage or capital-intensive businesses.
In contrast, C-Corp losses stay within the corporation and can only be used to offset future profits through Net Operating Loss (NOL) carryforwards.
Businesses with heavy upfront investment—like equipment or labor capacity—should consider how entity structure supports loss absorption. For example, capacity and production planning can significantly influence when and how those losses occur.
With S-Corps, owners who also work in the business must pay themselves a “reasonable salary,” which is subject to payroll taxes. Any remaining profit can be taken as a distribution—not subject to FICA taxes—offering potential tax savings.
C-Corp owners typically receive W-2 wages and dividends. Wages are subject to payroll tax, and dividends face double taxation. There’s less flexibility in how income is categorized.
However, S-Corp owners need to be cautious. Underpaying yourself in an attempt to minimize payroll taxes can raise red flags with the IRS.
Not all businesses can become S-Corps. To qualify:
C-Corps have no such restrictions and are often the default structure for startups, particularly those seeking venture capital or planning to go public.
For companies preparing for future investment or sale, C-Corp status may offer more flexibility in equity structure and long-term growth.
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A mid-sized manufacturing company is projecting steady year-over-year growth and reinvests approximately 80% of its net profits back into R&D and equipment upgrades. With plans to raise Series A funding within the next 12 months, the business is structuring its equity offering to appeal to institutional investors. Given its reinvestment strategy and the need to issue preferred shares to external stakeholders, a C-Corp status offers key advantages—including unlimited shareholders, multiple stock classes, and the ability to retain earnings without triggering shareholder-level tax. In this scenario, a C-Corp structure aligns with both short-term capital goals and long-term expansion plans.
The tax difference between an S-Corp and C-Corp isn’t just about rates—it’s about strategy. It affects your distributions, reinvestment plans, financing structure, and even your personal tax liability.
A misaligned structure can lead to higher taxes, limited growth flexibility, or missed deductions. But when chosen intentionally, your entity type becomes a powerful lever for both tax efficiency and business scalability.
If you're unsure which structure best supports your financial goals, a fractional CFO can help you model the tax impact and long-term implications of each. Learn more in our guide to fractional CFO services in manufacturing.
Need help deciding between an S-Corp or C-Corp structure for your business? Schedule a financial strategy session with Accounovation and build a tax structure that grows with you.