There are four types of corporations: professional corporations, C corporations, S corporations, and non-profit corporations.

Professional Corporation (PC)

Many professionals (doctors, attorneys, engineers, public accountants, etc.) are required by law to incorporate their professional service business as a professional corporation (PC). While the PC can be used by a professional to isolate himself from the labiality of other partners, it does not limit his personal liability for malpractice. In other words, even with a PC, all of the assets held in the PC or in your name can be taken to satisfy a judgment against you for malpractice. Thus, it is very important for professionals to have practice assets (building, equipment, etc.) and personal assets (home, cash, art, stocks, etc.) in LLCs and/or FLPs. In the event of a malpractice lawsuit, your business and personal assets will be protected from seizure and unaffected by the lawsuit.

professional corporation may elect to be taxed as a C corporation or S corporation. However, a professional corporation taxed as a C corporation does not have the advantage of the graduated corporate federal income tax rate. Instead it pays a flat rate of 35% federal tax. Salaries are tax-deductible expenses, so professional corporations taxed as C corporations will usually pay all income as salaries (or other benefits) to shareholders, reducing taxable income for the corporation to zero to avoid double taxation. If the professional corporation elects to be taxed as an S corporation, the corporation is not taxed, but is a pass-through entity, with all profits distributed to shareholders. The earnings are reported and taxed on individual returns.

Even if a professional practice must be incorporated as a professional corporation, a professional could also have a C corporation, S corporation, LLCs, and/or family limited partnerships that own the building, equipment, and other assets for lawsuit protection and tax reduction purposes.

Where to Incorporate

C Corporation vs. S Corporation

Federal Taxation

C corporations are taxed entities and must report profits and losses on a corporate tax return. The federal taxes on C corporations are a progressive tax with the tax rate beginning at 15% and going to 35%. The state tax rates on C corporations vary from state to state and range from 0% (Nevada, South Dakota, Washington, and Wyoming) up to 12% (Iowa). The profits of a C corporation are taxed at the federal and state tax rates. If the corporation distributes profits to shareholders through dividends, the shareholders must report this income on their return and pay income tax at their personal tax rates. This is referred to as double taxation, since the profits of the corporation are taxed once at the corporate level and then again on the individual tax returns of the shareholders who received profits from the corporation. C corporations can avoid double taxation by retaining earnings in the C corporation, by expensing all profits through salaries/benefits to owners, and/or by making payments to other entities for consulting, leasing equipment, or licensing intellectual property.

S corporation is not taxed at the corporation level and is considered a pass-through tax entity. An S corporation must complete an informational tax return each year (1120S Form), and the profits must be distributed to the shareholders (owners). Shareholders will receive a K-1 from the corporation stating their portion of the corporation's profits or losses. Shareholders then report the K-1 income on their individual tax returns, and the income is taxed at their individual tax rates.

With a C corporation, shareholders are unable to report losses of the C corporation on their personal returns to offset other income. With an S corporation, the profit or loss passes through the entity to the shareholders. Should your share of S corporation losses be $10,000, you will receive a K-1 from the S corporation stating K-1 income of -$10,000. Reporting the loss of $10,000 on your personal tax return will reduce your taxable income by up to $10,000. The corporate losses you report on your individual returns cannot exceed the amount you have invested in the company.


C corporation can deduct medical expenses, under Internal Revenue Code Section 105, that are not available to S corporations or sole proprietors.


  • Both C corporation and S corporation ownership is held in shares of stock, and ownership is transferred by selling shares of the corporation's stock.
  • S corporation stock can only be held by individuals and certain types of trusts. It cannot be owned by an LLC, partnerships, corporations, and non-residents of the US. C corporation stock can be owned by LLCs, partnerships, corporations, other legal entities, and non-US citizens.
  • Stock can be divided into two different "classes": common and preferred. Common stock is the ordinary stock of the corporation that entitles the owner to voting (in most cases) and dividend rights. Preferred stock is a type of stock that gives the holder additional rights over common stock holders. Typically, preferred stockholders receive dividends and assets (in the event of liquidation) before holders of common stock. An S corporation is limited to issuing common stock. However, voting differences within a class of stock are allowed. C corporations can issue shares of preferred and common stock. Sometimes corporations will issue multiple classes of common stock with different voting rights. For example, Class A shares might have 1 vote per share, Class B shares might have 20 votes per share and Class C shares might have 50 votes per share. Warren Buffet's company, Berkshire Hathaway, has two classes of common stock designated: Class A and Class B. One share of Class B has 1/200th the voting power of one Class A share. A company may choose to issue multiple classes of stock to keep the voting power concentrated in the hands of the founders.
  • S corporations are limited to 100 shareholders while a C corporation can have an unlimited numbers of shareholders.

Taxes on Income to Owners

Salaries (W-2) received by owners in C and S corporations are subject to Social Security, Medicare, and income taxes. Profits, K-1 for S corporation, and dividends for C corporations are subject to income taxes, but are not subject to Social Security and Medicare taxes. For sole proprietorships, all profit (up to the taxable maximum) is subject to Social Security and Medicare taxes. Having your profits flow to you as K-1 income through an S corporation instead of as profit from a sole proprietorship could save you thousands each year in Social Security and Medicare taxes. The IRS requires that owner-employees of an S corporation be paid a salary that is a "reasonable amount" for the work being performed.

For example, if a sole proprietorship has a profit of $100,000, a 15.3% tax (12.4% Social Security tax and 2.9% Medicare tax) would have to be paid on the entire $100,000, totaling $15,300 ($100,000 x 15.3%). In comparison, if an S corporation has a profit of $100,000 and you pay yourself a reasonable salary of $40,000, the other $60,000 would flow to you as profit (K-1). It is not subject to Social Security and Medicare taxes. You only pay Social Security and Medicare tax on the $40,000 salary, for a tax of $6,120 ($40,000 x 15.3%). In this scenario, using an S corporation would save $9,180 ($15,300 - $6,120) in taxes each year.

Capital Accumulation

Retained earnings are a portion of profits that are retained by a corporation rather than distributed to its shareholders as dividends. Since the S corporation is a pass-through entity, it is required to distribute all profits to shareholders at the end of each year and is not allowed to retain earnings. C corporations are allowed to retain earnings, which enables you to take advantage of the 15% tax rate on the first $50,000 profit. If you are in a federal tax bracket higher than 15%, you may be able to reduce your taxes by setting up a Nevada C corporation and having a portion of your income flow to this corporation. Your corporation can retain these earnings so you are not double taxed. If you had a personal marginal federal income tax rate of 28% and a state income tax rate of 7%, you would pay $17,500 in federal and state income tax on that $50,000. If this $50,000 instead flowed to a Nevada C corporation, you would only pay the federal corporate tax rate of 15% or $7,500, saving you $10,000 in taxes. (Nevada corporations have no state income tax.)


Both C corporations and S corporations continue to exist after the death of their owners. The corporation carries on indefinitely until it is dissolved by a vote of the shareholders or dissolved by the state for failure to renew the corporation.

Fiscal Year

C corporations can choose when their fiscal year ends, while an S corporation's fiscal year must end on December 31. Having a different year end can delay tax on distributions to officers and shareholders. For example, if a C corporation sets a year-end date of January 31, they could pay year-end bonuses, dividends, etc. in January and deduct the expenses in that year's corporate tax return. Since individuals observe the standard calendar year for taxation, the recipients of year-end bonuses and dividends would not have to declare the income on individual tax returns until the next year, since the payments were made in January.


The American Society for Asset Protection can help you decide how to best structure your businesses and assets for lawsuit protection, tax reduction, and estate planning.