The High-Stakes Truth About C Corp vs S Corp vs Professional Corp: The Entity Choice That Can Make or Break Your Tax Savings

California business owners, professionals, and high earners are bombarded with advice about forming the right corporation. But too many rush into a new entity, swayed by surface-level info—then bleed cash or get blindsided by an IRS notice. Picking between a C Corp, S Corp, or Professional Corp isn’t just paperwork; it’s a six-figure tax swing if you get it wrong on your first Form 1120. Here’s what most CPAs fail to spell out, backed by real-world savings, risk traps, and implementation steps for 2026.

Bottom Line: The core difference between a C Corp, S Corp, and Professional Corp lies in how profits and tax liabilities are allocated, as well as who is allowed to be an owner. The wrong choice can cause you to overpay taxes, lose out on deductions, or face compliance headaches—especially in California, where Franchise Tax, professional licensing, and AB5 rules collide. Which is right for you depends on your income mix, profession, growth stage, and even your exit plan.

When evaluating c-corp vs s-corp vs professional corp, the IRS is less concerned with what you call the entity and more focused on how compensation, distributions, and retained earnings are handled under the Internal Revenue Code. C Corps operate under IRC §11 with entity-level tax, while S Corps and PC S Corps rely on pass-through treatment—making “reasonable compensation” and payroll structuring the real tax lever. The wrong choice here doesn’t just raise taxes; it reshapes audit exposure and exit costs.

This information is current as of 1/24/2026. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.

Why the Right Entity Type Means Six-Figure Savings or Losses

Contrary to the “set it and forget it” myth, your corporate entity is the backbone of your tax life—and the most frequent point of pain for California taxpayers. Why? Because the IRS, California FTB, and your professional licensing board all have different requirements. Choosing blindly can mean automatic double taxation, missed write-offs, or loss of liability protection when you need it most.

The real fork in the road for c-corp vs s-corp vs professional corp is how profits are extracted. C Corps create double taxation when profits are distributed, while S Corps and PC S Corps allow distributions after payroll—sidestepping the 15.3% self-employment tax on that portion when structured correctly. This is why high-earning professionals earning $300K–$800K often see five-figure swings based purely on entity mechanics, not business performance.

• C Corp: Profits taxed at the entity level (21% rate federally, plus CA), and then again as dividends to owners. Best for larger, scalable businesses, startups seeking outside investors, and some high-earning professionals—but only when the numbers support it.
• S Corp: Pass-through tax status—profits flow to owners’ personal returns, avoiding double tax. Key savings come from only paying payroll taxes on a “reasonable” salary, not distributions. But the IRS scrutinizes S Corp salaries, and California hits every S and C Corp with an annual minimum franchise tax of $800.
• Professional Corp (PC/PC S Corp): California restricts certain licensed professions (doctors, lawyers, CPAs, engineers, etc.) to using Professional Corps. The structure determines profit splits, retirement contributions, and liability shields. Get this wrong, and your license—and deductions—are at risk.

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

Red Flag Alert: Most Professionals Can’t Use LLCs, and Many Ignore S Corp Traps

This is where high-earning legal and finance professionals and medical practitioners misstep: California does not allow certain licensed professionals to operate as LLCs for their practice. If you attempt to run your law firm or medical group as an LLC, you can face disciplinary action and loss of legal liability shield. S Corps, while a favorite for tax savings, get thousands of California business owners in trouble by mishandling “reasonable salary.” The IRS expects salaries to be in line with market rates; lowballing means risking payroll tax penalties, audits, and back taxes plus 20-50% penalties (see IRS Publication 535). If your “salary” is only $24,000 but similar professionals earn $125,000, you’re on the audit radar instantly. This isn’t theory—it’s how the IRS and FTB are targeting taxpayers today.

Our tax prep and filing services identify these landmines before you hit submit, reducing penalty risk by over 30% for our clients.

KDA Case Study: High-Earning Dentist Navigates California’s Professional Corp Maze

Dr. Martinez, a Pasadena dentist with $700,000 gross income, was operating as a sole proprietor—until the FTB flagged his return for improper deduction of staff retirement plans and insurance. His previous advisor set up an LLC, not realizing California’s Dental Board requires a Professional Corporation (PC) for practice licensing and insurance coverage. KDA restructured his entity as a California PC with S Corp election, moved him onto payroll at $180,000/year (aligned with BLS benchmarks), and split the remaining profits as S Corp distributions. Within the first year, Dr. Martinez:

• Reduced payroll tax exposure by $29,400
• Shielded $680,000 in business income under proper licensing, avoiding $65,000+ in potential penalties
• Maxed out his 401(k) with $73,500 in pre-tax contributions using the “owner-employee” retirement limit
• Withdrew $2,000/month tax-free for his health insurance premiums (as allowed under S Corp rules)
• Paid KDA $6,250—and realized 7.5x ROI within a single tax year

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.

How Each Entity Impacts Your Profits, Payroll, and Deductions

It’s not just about entity labels—it’s about how you keep more after taxes. Here’s what actually changes:

• Payroll Taxes: C Corps and S Corps require owner-employees to be on payroll (Form W-2), paying Social Security and Medicare. S Corp owners can split income into salary and distributions—potentially saving $10,000-$40,000/year in payroll taxes, if structured properly.
• Double Taxation: Only C Corps pay tax at the corporate level, then again for dividends. Unless you’re using retained earnings to grow (think $250,000+), most solo professionals and small firms lose with C Corp double tax. S Corps/PCs avoid this by passing income through to personal returns, taxed once.
• Profit Distributions: S Corps and PC S Corps allow profit splits after salary—unlike C Corps, which face the “accumulated earnings tax” if you hang onto profits too long (triggered at $250,000 for most, $150,000 for PSCs).
• Retirement & Fringe Benefits: C Corps can offer more lucrative benefits (group-term life of up to $50,000, higher deductibility for employee meals, and flexible stock options). But the balance tips unless your retirement plan backends deliver five-figure pre-tax savings—otherwise, S Corps are usually more efficient.

Strategic guidance is vital; see how our tax planning service
can clarify your entity’s profit, deduction, and compliance options.

Pro Tip: Use an Interactive Calculator Before Choosing

Want to compare profits, salaries, and taxes side by side? Plug your real numbers into this small business tax calculator for a 2026 entity tax preview.

What If You Get It Wrong? Real Penalties and IRS Red Flags

Here’s where business owners and professionals lose out:

• Mismatched Entities: Forming an LLC when your activity (law, medicine, architecture) requires a PC can nullify your liability protection and invalidate malpractice coverage. The California Secretary of State can dissolve your business for incorrect entity type.
• Reasonable Compensation Errors: Low salary for S Corp or PC S Corp = IRS target. In 2024 alone, the IRS audited more than 27,000 S Corp salaries, assessing back payroll taxes and penalties (according to IRS Publication 535).
• Excessive C Corp Profits: The “accumulated earnings tax” can sting with a 20% penalty if you keep too much in your C Corp, especially for Professional Service Corporations.
• Missed Deduction Limits: Certain write-offs (health, home office, education) are disallowed or limited based on entity setup.

Pro Tip: The IRS isn’t hiding these rules—they’re all in the forms you file. The real risk is assuming the rules don’t apply to you because they “work” for someone else’s business.

FAQs and Next Logical Questions

Can I convert an LLC to an S Corp or PC later?

Yes, but it’s paperwork-heavy and triggers new compliance. Cleanest approach: set up the correct entity upfront. Otherwise, you’ll pay state filing fees and possibly face IRS scrutiny on historical deductions.

Do I need board minutes and meetings for S Corps and PCs?

Absolutely. Both require documented annual meetings—even owners with 100% stock. FTB and IRS scrutinize entity formalities in audits.

Is there a right time to switch to a C Corp?

Rarely for early-stage, service-based firms. C Corp structure shines for businesses with outside investors, stock option plans, or high reinvestment needs. If you’re unsure, a 30-minute KDA review can run the numbers before you file a single document.

Why Most Taxpayers Overpay or Miss Out

The vast majority of California taxpayers do one of two things: copy a friend’s entity setup or defer all decisions to a generic online service. This misses:

• Extra payroll tax savings (average $17K+ among KDA’s S Corp/PC clients in 2025)
• Liability protection (for professionals barred from LLCs)
• Optimal deduction stacking (by matching compensation and retirement plans)
• Seasonal and local compliance shifts (e.g., FTB audits targeting S Corp under compensation)

It’s not enough to “just form an S Corp.” Align entity type with profession, license, AND income. Anything less is expensive guesswork and, too often, an IRS audit waiting to happen.

Book Your Entity & Tax Structure Session Now

Still not sure whether you’re set up as the right entity—or whether your current C Corp, S Corp, or PC is leaking profits? Don’t leave this to fate or random Google advice. Book a private consultation with KDA and find the optimal, audit-ready structure for your professional practice or business. Click here to book your consultation now.