C-Corp vs S-Corp: the eligibility rule that decides for Indian founders

C-Corporation and S-Corporation are not different entity types - both are corporations filed in a US state. The difference is a federal tax election. A C-Corp pays corporate income tax at 21% federal plus state, and shareholders pay tax on dividends. An S-Corp passes income through to shareholders who pay individual rates. The decisive rule for Indian founders: S-Corp shareholders must be US citizens or resident aliens. Non-resident aliens cannot hold S-Corp stock, which closes the door for India-based founders.

C-Corp: corporate tax at 21% federal flat rate. Distributions taxed as dividends at 0/15/20% qualified dividend rate for individuals. Effective combined rate around 36-40% before state. S-Corp: no entity-level federal tax (a few states like California impose a 1.5% S-Corp tax). All income, deductions and credits flow through to shareholders' personal returns on Schedule K-1. Combined federal rate matches the shareholder's individual bracket, max 37%. For high-income shareholders, S-Corp avoids double taxation; for venture-backed startups stockpiling capital, C-Corp's 21% retained-earnings rate is cheaper.

S-Corp election under Subchapter S of the Internal Revenue Code requires: maximum 100 shareholders; only US citizens or US tax-resident individuals as shareholders (no non-resident aliens); single class of stock (preferred stock breaks the election); domestic corporation only. The non-resident alien rule is the binding one for Indian founders. An Indian-resident founder cannot hold S-Corp stock directly. Even one disqualifying shareholder terminates the S election retroactively, exposing the company to double-tax surprise.

If only the US-resident co-founders own the operating entity, S-Corp election can work for them, and the India-based founder can hold a separate non-S-Corp entity that does not participate in equity. Some founders try a US LLC owned by an NRA as a 'shareholder', but a single-member LLC owned by an NRA is a disregarded entity and inherits the NRA status, killing the S election. Trust-based workarounds (QSST, ESBT) have their own complications and rarely fit founder situations.

For Indian founders, default to Delaware C-Corp. It is what VCs require, it accepts foreign shareholders, it accommodates preferred stock and option pools, and the 21% retained-earnings rate is reasonable for growth-stage companies. State franchise tax in Delaware is minimal at the startup stage. If you want pass-through taxation and the company is US-resident-only, an LLC taxed as partnership often beats S-Corp for flexibility and avoids the single-class-of-stock trap. Make the entity choice with the eventual exit and investor base in mind.

Can an Indian-resident founder be an S-Corp shareholder?
No. S-Corp shareholders must be US citizens or US-resident aliens. Non-resident aliens, including Indian-resident founders, are disqualified. Even one disqualifying shareholder terminates the S election.

Is C-Corp tax actually double taxation?
Technically yes - corporate tax at 21% plus shareholder dividend tax. In practice, growth-stage startups do not pay dividends, so the second layer is deferred until exit. At exit, capital gains rates often apply, softening the impact.

Can a US LLC owned by an NRA hold S-Corp stock?
No. A single-member LLC owned by an NRA is a disregarded entity for US tax purposes, so the NRA is treated as the direct shareholder. The S election fails. Multi-member LLCs are partnerships and also cannot hold S-Corp stock.

What is the franchise tax in Delaware for a C-Corp?
Minimum USD 175 annually for the authorised shares method, scaling up by share count and value. Most startups pay between USD 400 and USD 800. Delaware also requires a USD 50 annual report fee.

Can I convert from C-Corp to S-Corp later if my shareholders become US-resident?
Yes, by filing Form 2553 within the prescribed timeline. But the conversion has tax consequences - built-in gains tax on appreciated assets for five years post-conversion, and you must terminate all NRA shareholders first.

What about LLC vs C-Corp for an Indian founder?
LLC is simpler and flexible but most US VCs will not invest in an LLC. For a bootstrapped business with no VC plans, LLC works. For anything aiming at venture or eventual M&A, C-Corp from Day 1 is the default.