What Is a S Corp vs C Corp? The $30,000 Dilemma Most California Owners Still Get Wrong in 2025

Most California business owners risk losing $30,000 or more every year simply by misunderstanding the difference between a S Corp and a C Corp. The stakes: Double taxation, audit risk, and missed strategies that could triple your after-tax profits. Are you sure you’re in the right entity? Because according to our latest analysis for 2025, a majority of LLCs and corporations in this state are leaving profit on the table—and inviting unwanted IRS attention in the process.

For the 2025 tax year, California business owners face two fundamentally different paths when choosing how their company is taxed: S Corporation (S Corp) or C Corporation (C Corp). Each impacts not only your federal and state tax bills but also how (and when) you get to enjoy your hard-earned money. This blog dives past the surface to reveal, in plain English, how to make the right choice for your bottom line—whether you’re a W-2, 1099, real estate investor, or high-income entrepreneur.

This information is current as of 10/28/2025. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.

Quick Answer: What’s the Real Difference Between a S Corp and a C Corp?

S Corps and C Corps are both legal structures for corporations, but they are taxed in completely different ways. S Corps allow business income to pass directly through to shareholders and be taxed at individual rates (avoiding double taxation). C Corps pay corporate taxes on their profits, and owners are taxed again when receiving dividends. The choice affects income tax, payroll tax, audit risk, and the ability to attract investors — with consequences that can swing your annual take-home by tens of thousands of dollars.

When tax advisors talk about what is a S Corp vs C Corp, they’re referring to how profits are taxed and who bears the liability. An S Corporation is a “pass-through” entity under IRS Subchapter S — meaning profits skip the corporate tax layer and flow to the owner’s Form 1040. A C Corporation, governed by Subchapter C, pays its own tax first (Form 1120) and only then distributes after-tax profits to shareholders. This single difference drives every downstream strategy — from payroll setup to dividend timing.

The S Corp Advantage: How Pass-Through Taxation Shields Income

The biggest reason California entrepreneurs choose a S Corp is simple: avoiding double taxation. Under federal law (see IRS S Corp basics), an S Corp’s profits pass directly to shareholders, who report that income on personal returns (Form 1120S + K-1). This means your business doesn’t pay a separate corporate income tax. As a result, many owners can legally avoid paying both a 21% federal corporate rate and the 8.84% California corporate rate for C Corps.

Understanding what is a S Corp vs C Corp also comes down to IRS qualification rules. The IRS caps S Corps at 100 shareholders, all of whom must be U.S. individuals or certain trusts — a major reason why investors often prefer C Corps. In contrast, C Corps face no such limits, allowing venture capital, foreign ownership, and multiple stock classes. These technical restrictions, listed under IRC §1361, are exactly what shape the funding and scaling path of California startups.

• A California S Corp with $200,000 profit lets its owner pay just state and federal personal taxes, with no double hit on distributions.
• In contrast, a C Corp would pay roughly $42,680 in initial corporation tax on that profit (21% + 8.84%), leaving only $157,320 before owner gets taxed again on any dividends.

Real Example: Solo Consultant vs. Tech Startup

A W-2 turning 1099 consultant (such as an ex-engineer) with $150,000 profit elects S Corp status: She pays herself a $70,000 salary (via W-2, subject to payroll tax) and takes a $80,000 distribution with no self-employment tax, saving roughly $10,000 compared to sole proprietor or C Corp.

But a tech founder planning to raise venture capital? S Corp limits investor types and the number of shareholders (100 maximum, all must be U.S. persons), often requiring a C Corp structure (see more in our comprehensive S Corp tax guide).

KDA Case Study: Real Estate Investor Chooses S Corp to Sidestep Double Taxation

Doug, a California real estate investor earning $180,000/year from property management and flipping, came to KDA after paying C Corp rates for years. He did not realize that his $60,000 of profit each year was being hit twice (once at the corporate level, then again on personal dividends).

Our team analyzed his numbers and restructured his operating company into a S Corp. We filed Form 2553 with the IRS and handled all FTB compliance for state tax purposes. Doug distributed $100,000 to himself as salary and $80,000 as tax-advantaged distributions—saving over $16,200 in unnecessary taxes the first year compared to continuing as a C Corp. He paid KDA $3,750 all-in (including consultation, filings, and first-year S Corp payroll setup), resulting in a 4.3x ROI.

Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.

The C Corp Path: When Flat-Rate Tax and Unlimited Growth Make Sense

C Corps pay tax on profits at the corporate level (Form 1120), then shareholders pay again when receiving dividends—what’s called “double taxation.” For many small companies, this structure feels punitive. But C Corps offer unique benefits:

• Flat 21% federal rate (plus 8.84% CA corporate tax), regardless of owner’s personal bracket
• No restriction on type/number of shareholders or foreign owners, making it the default for VC-backed companies
• Ability to offer multiple classes of stock, attracting sophisticated investors and stock option plans
• Special tax credits, deduction options, and unique strategies for accumulating profits inside the company

Example: A California tech startup raising $2 million in seed capital needs a C Corp. Going S Corp would block foreign investors, restrict stock classes, and complicate funding rounds, even though the first-year corporate tax bill might be higher.

What If I Make Over $1 Million?

High earners sometimes use C Corps to “income cap” their personal taxes. By leaving large sums inside the business, they avoid personal top-bracket rates in peak years—but risk getting penalized (Accumulated Earnings Tax, 20%) if profits just sit there. Proper tax planning is essential to manage these risks (see IRS rules on retained earnings).

At high income levels, understanding what is a S Corp vs C Corp becomes a question of timing your taxation. C Corps can retain earnings at the 21% federal rate to smooth future income, while S Corps push all profits through to owners each year — ideal for businesses that distribute most cash. This is why the right structure depends not just on profit size but also exit horizon and reinvestment goals. Smart entity planning aligns your tax structure with your personal liquidity strategy, not just your current year return.

Why Most Business Owners Miss This Deduction

One of the biggest mistakes California business owners make is assuming they can “write off” the same expenses regardless of entity. In fact, your deduction options—and audit risk—change dramatically based on S Corp or C Corp setup. For example:

• Health insurance and fringe benefits: C Corps can often fully deduct owner health premiums; S Corps face stricter limits, especially for 2%+ owners (IRS Pub 15-B detail).
• Paying yourself: C Corp owners on payroll often pay more total tax on distributions; S Corps can combine W-2 salary with distributions to cut self-employment and Medicare taxes.
• Qualified Business Income (QBI) Deduction: Only S Corps (and LLCs taxed as S) benefit from this 20% pass-through break—C Corps are ineligible.

Pro Tip: Review all current-year pay structures and benefit plans with a specialist before making or changing your election. One wrong move could trigger IRS penalties or eliminate a key deduction for years!

Pro Tip: How Switching Entities Could Save (or Cost) $20K Overnight

Don’t think you’re stuck if you originally chose the wrong structure. Converting from a C Corp to S Corp (or vice versa) is possible, with the right strategy and timing. The IRS has strict rules and waiting periods (see Form 2553 for S Corp election or Form 1120 for C Corps). But beware: Switching can trigger built-in gains tax, retroactive penalties, or loss of key deductions (detailed S Corp strategy guide).

A recent KDA client netted $22,000 savings after switching from a C to S Corp following several profitable years—but would have faced a $9,000 penalty if the conversion missed the IRS window.

What If I’m an LLC? S Corp and C Corp Election Explained

Most California LLCs can elect to be taxed as either a S Corp or C Corp by filing IRS Form 2553 or 8832, respectively. Make this decision based on a projected five-year profit outlook, not just this year’s taxes. For multi-partner real estate, consider a partnership structure or series LLC for maximum flexibility and write-off power.

Action Step: Review your entity classification annually, especially after earning $75K+ in net business profit, taking on new partners, or planning a sale/acquisition.

Common Misconceptions About S Corp vs. C Corp (2025 Edition)

• Myth: “S Corps are audited more often.”
  Fact: Audit risk is higher if you underpay yourself as an owner-employee—or fail to follow formalities. Entity choice alone isn’t the trigger.
• Myth: “I have to form a new company to change from C to S (or vice versa).”
  Fact: In most cases, you can elect to change the tax treatment with the IRS using official forms—no need to dissolve and start over.
• Myth: “All company profits get taxed the same way.”
  Fact: The timing, amount, and tax rate all depend on entity type and your payout choices each year.

FAQ: S Corp and C Corp Questions Every California Owner Asks

Will I Really Save on Taxes by Switching?

Often, yes—especially once your business profit (after expenses) crosses $80,000 a year. S Corps can cut self-employment tax by 6-8%, usually saving $6,000-$12,000+ after payroll and compliance costs.

Can a C Corp Ever Be Cheaper?

For scaling companies planning to raise equity or accumulate profits, a C Corp’s 21% federal flat rate plus special deductions can create temporary savings. Long-term, you’ll need to manage double taxation risk on dividends.

Is It Hard to Elect S Corp Status?

No, but you must file Form 2553 with the IRS (plus CA Form 100S for state). Timing and documentation matter—a missed deadline can derail the change for a full tax year.

How Do I Know If I’m S or C Corp Right Now?

Check your last tax return: S Corps file Form 1120S; C Corps file Form 1120. CA S Corps file Form 100S as well.

For a complete breakdown of S Corp strategies, see our comprehensive S Corp tax guide.

Bottom Line

Choosing between a S Corp and a C Corp in California is not a paperwork formality—it sets the stage for everything from your annual tax bill to investment options and audit risk. Most business owners with $80,000+ in annual profit will benefit from S Corp election, but C Corps are essential for scalable startups or global investors. The worst move? Treating your entity as a “set and forget.” Annual review with a strategy-first tax advisor will protect you from both IRS penalties and overlooked savings.

“The IRS isn’t hiding these entity write-offs — most owners just aren’t taught to find them.”

Book Your 2025 California Entity Checkup & Save Tens of Thousands

If you’re not sure if your current S Corp or C Corp setup is costing you $10,000 or more in unnecessary taxes, now’s the time to fix it. Book a 1:1 strategy session with our team and leave with a personalized, California-synced entity strategy to keep more of your profits. Click here to book your consultation now.