When a C corporation makes sense
- You plan to reinvest profits in the business rather than distribute them, so the flat 21% corporate rate applies instead of your personal rate.
- You plan to raise venture or angel capital; most institutional investors expect a C corporation.
- You may sell the company someday and want to qualify for the qualified small business stock exclusion.
The trade-off is double taxation: profits paid out as dividends are taxed again to shareholders. For businesses that distribute most of their profit, a pass-through entity is usually better.
Qualified small business stock (Section 1202)
Gain on the sale of qualified small business stock can be partly or fully excluded from federal tax. For stock issued after July 4, 2025, the 2025 tax law expanded the benefit:
- Tiered exclusion: 50% of the gain after three years, 75% after four years and 100% after five years.
- Higher cap: the greater of $15 million or ten times your basis, per company.
- Larger companies qualify: the corporation's gross assets can be up to $75 million when the stock is issued.
Stock issued on or before July 4, 2025 stays under the prior rules: a five-year holding period and a $10 million cap.
The fine print that decides eligibility
- The stock must be acquired at original issuance, generally for money, property or services.
- The company must be a domestic C corporation using at least 80% of its assets in an active qualified business.
- Many service businesses don't qualify, including health, law, accounting, consulting, financial services and businesses whose principal asset is the reputation or skill of employees.
- State treatment varies, so state tax on the gain can differ from the federal result.
Frequently asked questions
Is a C corporation better than an S corporation?
For businesses that distribute most of their profit, usually not, because of the second tax on dividends. For companies reinvesting profits, raising outside capital or aiming for a QSBS exit, a C corporation can be better.
How much gain can QSBS exclude?
For stock issued after July 4, 2025, up to the greater of $15 million or ten times your basis per company, with 50%, 75% or 100% of the gain excluded after three, four or five years.
Does my professional practice qualify for QSBS?
Generally not. Businesses in fields such as health, law, accounting, consulting and financial services are excluded.
Can I convert my LLC to a C corporation to get QSBS?
Often yes, and the QSBS clock generally starts when the stock is issued. The conversion itself needs careful planning, so talk to us and your attorney first.