C-Corporation

A C-Corporation is a legal entity taxed under Subchapter C of the IRC. Unlike pass-through entities (LLCs, S-Corps, partnerships), C-Corp profits are taxed at the corporate level — currently a flat 21% federal rate — and then taxed again when distributed as dividends.

Why VC-backed startups choose C-Corp

Despite the double-taxation overhead, C-Corps are the standard entity for venture-backed startups because:

• QSBS eligibility (Section 1202): only C-Corp stock qualifies
• Foreign + institutional investors: most VC funds and many foreign investors cannot hold S-Corp or LLC interests
• Multiple share classes: preferred + common with different rights; S-Corps cap at one class of stock
• Unlimited shareholders: S-Corps cap at 100 shareholders
• Stock options + ISOs: only C-Corps can grant true ISOs

When NOT to choose C-Corp

For founder-operated profitable businesses without external investors:

• LLC taxed as S-Corp is usually more tax-efficient (profits flow through; potential SE-tax savings on distributions)
• C-Corp double-taxation means a profitable retail business or consultancy that distributes earnings ends up with much higher effective rates

The 21% rate + the qualified-dividend rate

C-Corp distributions to individual shareholders are typically taxed as qualified dividends at LTCG rates (0/15/20%) + NIIT. So profitable C-Corp earnings distributed to founders pay 21% at the corp level + 20% + 3.8% NIIT at the individual level — a combined ~40% rate before state. Compare to S-Corp at ~37% ordinary + 3.8% NIIT only at the individual level.

Retaining earnings

C-Corps that reinvest earnings (typical of VC-backed startups) avoid the second layer of tax until a liquidity event — and the liquidity event itself may be QSBS-eligible, eliminating federal cap gains tax.