Q: Is an S Corp a different type of company than a C Corp?
A: No. An S Corp is a C Corporation that has elected S Corp tax status with the IRS. Same entity, different tax treatment.
S Corporations: The Tax Election Your Accountant Forgot to Explain
Angel → Series AUS B2B StartupsEntity Formation
An "S Corp" is not a type of company. It's a tax election you file with the IRS on top of a regular corporation. This page will tell you what that actually means, when it makes sense, and when it'll blow up in your face.
TL;DR
An S Corp is a C Corporation + a federal tax election. Not a different entity type.
You form a corporation first, then file IRS Form 2553 to elect S Corp tax status.
S Corps provide pass-through taxation: profits/losses flow to shareholders' personal returns.
Eligibility limits are strict: no entity shareholders, ~100 shareholder max, restrictions on non-US shareholders, one class of stock only.
VC investment (preferred stock, fund ownership) typically ends S Corp status—plan for this.
Delaware is the go-to state for corporations, but you still register where you operate.
Form 2553 has timing windows—miss them, and you wait until next tax year (or file for relief).
Online formation services can handle basics but often skip securities filings and proper stock setup.
Lawyer-supported formation costs more upfront but avoids cleanup costs later.
Definitions: Let's Get the Words Right
Corporation
Plain English: A separate legal entity that can own stuff, sign contracts, and shield you from personal liability. It exists independently from the humans who own it.
The legal term: A business entity formed under state law (Delaware, in most startup cases) by filing a Certificate of Incorporation.
S Corporation Election
Plain English: A tax status you opt into with the IRS so your corporation's profits and losses pass through to shareholders' personal tax returns—avoiding corporate-level federal income tax.
The legal term: An election made via IRS Form 2553 under Subchapter S of the Internal Revenue Code.
Process vs. Document: Know the Difference
Getting S Corp status isn't about downloading the right PDF. It's about doing the right things in the right order at the right time.
Documents (What You Sign/File)
Certificate of Incorporation (state filing)
EIN application (IRS Form SS-4)
IRS Form 2553 (the S election itself)
Bylaws
Initial board/stockholder consents
Stock purchase agreements
Intellectual property assignment
Process (Sequence + Timing + Gates)
Choose state + pick a unique name
File certificate → corporation exists
Get EIN (name must match exactly)
Initial setup: governance, founder stock
File Form 2553 within the timing window
Maintain S eligibility requirements
Keep records, annual filings
Same documents, wrong sequence = expensive cleanup. The order matters.
Order of Operations: Founder-Friendly Walkthrough
1
Choose your state + name
Delaware is the default for venture-track startups (investor familiarity, established case law). But you still need to register in states where you operate. Local-state incorporation can save on franchise taxes early, but may cost more later if you grow or transact broadly.
Watch out: Check Delaware's website to confirm your name isn't taken. Do a basic trademark knockout search.
2
File the Certificate of Incorporation
This is the only document filed with the state. Everything else is internal. Delaware can expedite filings very quickly—for a price. Standard filing fees vary; rush options cost more.
Watch out: The legal name here is what you'll use everywhere. Don't get creative with spelling if you want people to find you.
3
Get your EIN
Apply for your Employer Identification Number (IRS Form SS-4). Use the exact legal name from your Certificate of Incorporation.
Watch out: Name mismatch between certificate and EIN is a pain to fix. Get it right the first time.
4
Initial setup: governance + founder stock
Adopt bylaws, hold initial board/stockholder actions, issue founder stock, assign IP to the company. This is where founders actually become shareholders.
Watch out: Founder stock isn't valid until board-approved and paid for (cash or IP assignment). Vesting and 83(b) elections matter here—separate topics, but don't skip them.
5
File IRS Form 2553 (the S election)
This is the actual S Corp election. Follow the Form 2553 instructions carefully for timing requirements. Generally, you must file within 2 months and 15 days of the start of the tax year you want S status to apply.
Watch out: Miss the window? You wait until next tax year—or file for late election relief (which isn't guaranteed). Confirm current IRS instructions; timing rules can change.
6
Keep records + maintain compliance
Annual state filings, franchise taxes (March 1 for Delaware), registered agent, meeting minutes. S Corp status requires ongoing eligibility—violate the rules, lose the election.
Watch out: Adding an entity shareholder, issuing preferred stock, or exceeding shareholder limits = S status terminated. Plan ahead.
When S Corp Election Fits
S Corp election tends to work well when:
All shareholders are US individuals
No entities (LLCs, other corporations, VC funds) on the cap table.
You have <100 shareholders
Shareholder limits apply (guidance hovers around ~100; confirm with IRS rules).
One class of stock
Common stock only. No preferred stock with special rights.
Pass-through taxation helps you
Profits/losses flowing to personal returns is advantageous for your situation.
When S Corp Election Breaks
S Corp status terminates—often involuntarily—when:
VC funds invest
VC funds are entities, not individuals. The moment a fund owns stock, you lose S Corp status. This includes most priced rounds (Series Seed, A, etc.).
You issue preferred stock
S Corps can only have one class of stock. Preferred stock (with liquidation preferences, anti-dilution, etc.) = second class = bye bye S status.
Non-US shareholders
Restrictions apply to non-resident alien shareholders. If your co-founder isn't a US person (citizen or resident), confirm eligibility with counsel/IRS instructions.
Too many shareholders
Exceed the ~100 shareholder limit (certain family members can count as one; rules are specific) and you're out.
Concrete Examples
Example 1
Two US Founders, No Immediate VC
Situation: Two US citizens starting a SaaS company. They're bootstrapping, maybe taking angel checks from individuals. No VC on the horizon for 18+ months.
S Corp fit? Likely yes. Pass-through taxation means they avoid corporate-level federal income tax. Losses in early years can offset other personal income. They can always convert to C Corp taxation later when they raise.
Process note: Form the Delaware corporation, file Form 2553 within 2 months 15 days of incorporation (or start of tax year), issue common stock to founders with vesting.
Example 2
Fundraising Path with Preferred Stock
Situation: Founders start as S Corp. Six months later, they're closing a $2M seed round with a VC fund. The term sheet includes preferred stock.
What happens: S Corp status terminates when either (a) the fund (an entity) becomes a shareholder, or (b) preferred stock is issued. Usually both happen at closing.
Result: Company reverts to C Corp taxation. Not necessarily bad—most VC-backed companies are C Corps anyway. But the transition should be planned, not a surprise.
Lesson: S Corp can be a good early-stage choice, but know the exit ramp exists. Build with awareness that you'll likely become a C Corp if you raise institutional money.
Example 3
Delaware Corp + Operating in California
Situation: Founders incorporate in Delaware (investor preference, established law) but operate from San Francisco.
Reality: You'll need to "qualify to do business" in California (foreign qualification). This means registering with the California Secretary of State, paying California franchise taxes, and maintaining a registered agent there too.
Why Delaware anyway? Investors expect it. Delaware's Court of Chancery has extensive corporate case law. Standard investment documents assume Delaware law.
Alternative: Incorporating in your operating state can save Delaware franchise taxes (~$400-500/year minimum), but may cost more in legal fees if you raise venture money later (investors may require a "redomestication" to Delaware).
DIY vs. Lawyer Help
Online Formation Services
(LegalZoom, Clerky, Stripe Atlas, etc.)
What they typically do:
File Certificate of Incorporation
Get your EIN
Provide template bylaws and consents
Some include Form 2553 filing
What they often skip:
Securities filings for stock issuance
Proper founder stock documentation
Customized governance setup
Board/officer structure guidance
IP assignment agreements
State qualification filings
Watch out: Some services default to "restricted founder stock" which creates extra tax chores (83(b) elections) that founders aren't always warned about.
Typical cost: ~$900–$1,200 all-in (including state fees)
Lawyer-Supported Formation
(Law firms, including us)
What lawyers typically handle:
All of the above, plus...
Founder equity allocation strategy
Vesting structure + acceleration terms
Board/officer governance setup
Whether/how to restrict founder stock
Securities compliance (state + federal)
S Corp election timing + requirements
Why it might be worth it:
Avoid cleanup costs from formation mistakes
Proper cap table from day one
Someone accountable if things go wrong
Diligence-ready when you raise
Typical cost: ~$1,500–$5,000 depending on complexity
Transparency moment
About 25% of Story LLP's clients come to us to fix messes that non-lawyer online services created. Cleanup always costs more than doing it right the first time. We're not saying you must hire a lawyer—we're saying you should understand what you're getting (and not getting) from each path.
Why This Matters
Getting entity + tax election wrong costs you later in:
Time
Fixing messes when you should be building
Money
Legal fees are never cheaper later
Deal Delay
Investors finding problems in diligence
S Corp election is a tool, not a badge. Use it when it fits; know when to let it go.
FAQ (Retrieval-Friendly)
Q: How do I "create" an S Corp?
A: Form a corporation first (file Certificate of Incorporation with your state), then file IRS Form 2553 to elect S Corp tax status within the required timing window.
Q: What is Form 2553?
A: The IRS form used to elect S Corporation tax status. It must be filed within specific timing windows—generally within 2 months and 15 days of the start of the tax year. Check current IRS instructions for exact requirements.
Q: Can a VC fund invest in an S Corp?
A: Not without terminating S Corp status. VC funds are entities, and S Corps cannot have entity shareholders. When a fund invests, the company reverts to C Corp taxation.
Q: Can I issue preferred stock in an S Corp?
A: No. S Corps can only have one class of stock. Preferred stock with special rights (liquidation preferences, etc.) creates a second class and terminates S status.
Q: How many shareholders can an S Corp have?
A: Approximately 100, though certain family members can be treated as one shareholder. The exact rules are specific—confirm with IRS guidance or counsel.
Q: Can non-US persons be S Corp shareholders?
A: There are significant restrictions on non-resident alien shareholders. If any founder or investor is not a US citizen or resident, confirm eligibility before electing S status.
Q: What if I miss the Form 2553 deadline?
A: You generally wait until the next tax year to elect, or you can file for late election relief under IRS procedures. Relief isn't guaranteed—timing matters.
Q: Should I incorporate in Delaware or my home state?
A: Delaware is the default for venture-track startups due to investor familiarity and established corporate law. But you'll still need to register in states where you operate. Local-state incorporation can save early costs but may require redomestication later.
Q: What's the difference between "authorized" and "issued" shares?
A: Authorized shares are the total your certificate allows. Issued shares are actually owned by shareholders. Your ownership percentage is based on issued shares, not authorized.
Q: Do online formation services handle everything I need?
A: They handle basics (certificate, EIN, maybe Form 2553) but often skip securities filings, proper stock documentation, and governance setup. Understand what you're getting and not getting.
Q: What's the typical cost for S Corp formation?
A: Online services: ~$900–$1,200 all-in. Lawyer-supported: ~$1,500–$5,000 depending on complexity. Cleanup later typically costs more than doing it right upfront.
Q: What happens to my S Corp status if I raise a Series A?
A: It almost certainly terminates. Most Series A rounds involve VC funds (entity shareholders) and preferred stock (second class of stock). Plan for C Corp taxation post-raise.
Q: Can I convert from S Corp to C Corp taxation?
A: Yes. S status can be revoked by the company or terminated automatically when eligibility requirements are no longer met. The transition has tax implications—consult with a tax advisor.
Q: Do I need a lawyer to form an S Corp?
A: Not required, but recommended if you have co-founders, plan to issue equity, or want to avoid common formation mistakes that cost more to fix later.
We're lawyers, remember? Please read this important note:
Story LLP is a law firm, and Story's lawyers built Aegis to deliver better, standard legal services at scale so founders can choose between elite specialized lawyers and standardized process automations that replicate those lawyers according to their needs and budget. By definition, a standardized process may not be perfect for you. Please review our Policies page to better understand the difference, as well as how we use AI and how we manage conflicts, privilege, etc.
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S-Corp Decisions Can Be Tricky
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