Tax
C-Corporation (C-Corp)
A corporation taxed as its own taxpayer at a flat 21% — with a second layer of tax when profits are distributed to shareholders as dividends.
A C-corp is the default tax classification for a corporation (and an available election for an LLC). Unlike passthroughs, the entity pays its own federal income tax at 21% on Form 1120; shareholders pay tax again on dividends. That 'double taxation' is why most profitable owner-operated businesses that distribute cash annually choose S-corp or passthrough treatment instead.
C-corp status earns its keep in specific fact patterns: startups raising venture or institutional capital (investors generally require it), businesses reinvesting essentially all profit for years, companies wanting unlimited or foreign ownership, and founders building toward a QSBS (Section 1202) exit where up to $15M of gain per shareholder can escape federal tax entirely.
C-corps also offer the cleanest fringe-benefit treatment — owner-employees can receive tax-free health and certain other benefits that are restricted for S-corp >2% shareholders and partners.
Common pitfalls
- Choosing C-corp for the 21% headline rate without modeling the dividend layer — the combined rate usually exceeds the passthrough alternative for cash-distributing businesses
- Accumulating cash indefinitely without a plan — the accumulated earnings tax exists to punish exactly that
- Converting an existing profitable LLC to C-corp for QSBS without understanding that only post-conversion appreciation gets the pre-conversion gain excluded — the QSBS math on conversions is subtle
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