C Corporation vs S Corporation: Key Differences for Small Businesses in California

If you’re starting a business in California, one of the biggest decisions you’ll make is how to structure it for tax and legal purposes. Many entrepreneurs are torn between choosing an S Corporation or a C Corporation — but what’s the real difference, and how does it affect your taxes?

Let’s break it down in plain English.

What Is a C Corporation?

A C Corporation is a separate legal entity from its owners (shareholders). It pays its own taxes and can retain profits within the business.

Key features:

• Pays federal corporate income tax on profits

• Double taxation risk: profits are taxed at the corporate level, then again when distributed to owners as dividends

• More flexibility with raising capital (can issue multiple classes of stock)

• Required for companies planning to take on venture capital or go public

What Is an S Corporation?

An S Corporation is a special tax election that lets business income pass through to the owner’s personal tax return — avoiding corporate tax.

Key features:

• No corporate-level tax — income is taxed only once at the personal level

• Owners must pay themselves a reasonable salary (subject to payroll taxes)

• Profits beyond salary are taxed as distributions, not subject to self-employment tax

• Limited to 100 shareholders, all of whom must be U.S. citizens or residents

Key Differences at a Glance

Feature	C Corporation	S Corporation
Taxation	Double taxation	Pass-through taxation
Owners	Unlimited	Up to 100 U.S. individuals
Stock	Multiple classes allowed	Only one class of stock
Ideal for	Startups raising capital	Small businesses seeking tax efficiency
Filing	Form 1120	Form 1120S (after electing S status via Form 2553)

California Considerations

In California, both C Corps and S Corps must:

• File with the California Secretary of State

• Pay the $800 minimum franchise tax annually

• File Form 100 (C Corp) or Form 100S (S Corp) with the Franchise Tax Board

Important:

Even if you elect S Corp status federally, you still need to elect S Corp status with California separately using Form 3560.

So Which Should You Choose?

Choose a C Corporation if:

• You plan to raise outside funding

• You’re okay with double taxation to gain flexibility and scale

• You’re preparing for acquisition or IPO

Choose an S Corporation if:

• You want to minimize self-employment taxes

• You’re a small business owner or freelancer

• You want to keep things simple while maximizing take-home profit

Need Help Choosing the Right Structure?

At Cardiff Tax Pros, we help California small businesses pick the right structure, handle the necessary filings, and set up a tax-efficient plan from day one.

Whether you’re forming a new business or switching from LLC to S Corp, we’ll walk you through it.