C-Corporation Tax Treatment
The default federal tax treatment of a corporation under Subchapter C of the Internal Revenue Code. The corporation pays entity-level income tax at the 21% federal rate; shareholders pay a second tax on dividends and capital gains. The "double taxation" structure that S-corp election or LLC pass-through treatment is designed to avoid.
C-corporation tax treatment is the default federal tax regime for corporations under Subchapter C of the Internal Revenue Code (IRC §§ 301-385). The corporation pays entity-level federal income tax on its taxable income at the 21% rate set by the Tax Cuts and Jobs Act of 2017. Shareholders pay a second layer of tax on dividends received and on capital gains realized when shares are sold. This "double taxation" structure is a principal reason many closely-held businesses elect S-corporation status or operate as LLCs treated as partnerships for federal tax purposes.
Two layers of tax
At the entity level, the corporation pays 21% federal income tax on taxable income (net of deductible expenses). When the corporation distributes after-tax earnings as dividends, individual shareholders pay tax on those dividends at preferential rates of 0%, 15%, or 20% depending on income level (qualified dividends), or at ordinary rates (non-qualified). When shareholders sell their shares at a gain, they pay capital gains tax at 0%, 15%, or 20%. For top-bracket shareholders, the combined rate on distributed earnings is about 36.8%, or 39.8% when the 3.8% net investment income tax applies.
When C-corp status is common
Despite the double-tax burden, C-corporation status is preferred or required for: (1) businesses planning to seek venture capital, since venture funds commonly require C-corp structure because pass-through income creates tax problems for their tax-exempt and foreign investors; (2) businesses with foreign or institutional shareholders not eligible to hold S-corp shares; (3) businesses planning to retain and reinvest earnings rather than distribute; (4) businesses qualifying for the Section 1202 Qualified Small Business Stock exclusion; (5) businesses with multiple classes of stock having different economic rights; and (6) larger ownership groups exceeding the S-corp 100-shareholder cap.
Texas dimensions
Texas does not impose a state corporate income tax, its franchise tax is a margin-based privilege tax separate from federal income tax classification. A C-corporation operating in Texas pays federal income tax at 21% plus Texas franchise tax (0.75% standard / 0.375% retail-wholesale) on taxable margin when total revenue exceeds the no-tax-due threshold. The absence of a state corporate income tax favors C-corporations whose business is in Texas. A corporation's state income tax exposure generally follows where it does business, not where it is incorporated.
Section 1202, the C-corp founder advantage
Section 1202 provides a substantial federal capital gains exclusion (potentially 100%) for founders of C-corporations meeting specified Qualified Small Business Stock criteria. For stock acquired after July 4, 2025, the exclusion is 50% after three years, 75% after four years and 100% after five years. Stock acquired earlier must be held more than five years. This benefit is unavailable for S-corporation stock and for interests in LLCs or partnerships taxed as partnerships. For founders building toward an exit, the Section 1202 exclusion can outweigh the ongoing double-tax cost. See Section 1202 / Qualified Small Business Stock.
The choice between C-corp and pass-through tax treatment often comes up again at major corporate events such as financing rounds, owner additions and acquisition discussions. The 21% C-corp rate, in effect since 2018, and the 2025 expansion of Section 1202 changed the calculus that prevailed earlier.