Startup Tax Hack: Why C-Corporations May Now Save Founders Up to $15 Million in Capital Gains

TL;DR: Forming a C-corporation can help you avoid taxes on up to $15 million in capital gains through the Qualified Small Business Stock (QSBS) exclusion, but only if key conditions are met. Strategic planning from day one is essential to unlock this powerful tax benefit. With the changes in the One Big Beautiful Bill Act (OBBBA), founders and investors can now unlock tiered-gain exclusions starting in year 3. Learn how to qualify, avoid traps and plan your startup structure for maximum tax efficiency.

Did you know that your C-corporation could help you save up to $15 million in capital gains from federal taxes when you sell QSBS-qualifying stock from your C-corporation down the road?

If you’re starting a tech or biotech company, structuring your startup as a C-corporation could result in massive tax savings, up to $15 million in capital gains exclusions when you eventually exit. This powerful benefit comes from the Qualified Small Business Stock (QSBS) exemption under Internal Revenue Code Section 1202, which rewards long-term holders of stock in eligible startups.

Recent legislation, the One Big Beautiful Bill Act (OBBBA), has expanded this benefit, making QSBS more valuable and accessible than before. But this benefit only applies if you choose and maintain the proper legal entity structure and meet specific eligibility rules. Here’s what founders need to know.

Advantages of a C-corporation

Let’s go back to the beginning, to startup formation. You are launching your startup, and you have to decide whether structure your startup as a limited liability company (LLC) or a corporation. Many entrepreneurs and founders struggle with the decision between a C-corp and an LLC, and many make the wrong choice (even when working with attorneys who are not specialized in startup matters).

An LLC offers flexible structuring and management, and is typically taxed as a pass-through entity, such that that profits are passed directly to the owners’ tax returns.

A corporation, on the other hand, is a more formal legal entity with well-defined ownership and governance requirements. And if you choose to set up a corporation, you will also need to determine whether it should be an S-corporation or a C-corporation.

To help decide between an S or C-corporation, you should consider the possible advantages of QSBS, which are only available if you operate your startup as a C-corporation. If the QSBS criteria are met, forming a C-corporation to run your startup might help you exclude up to 100% of the resulting capital gains from federal tax upon the future sale of your stock in the C-corporation.

In other words, with proper planning as a C-corporation, you might have the ability to exclude up to $15 million in capital gains from federal tax upon the future sale of your stock.

Some other advantages of starting as a C-corporation include:

• Limited liability protection – Protects founders’ assets from company debts and lawsuits.
• Attractive to investors – Most VC and institutional investors require a Delaware C-corporation.
• Retain earnings for growth – Unlike pass-through entities (i.e., S-corp, LLC), a C-corporation can retain profits without immediate distribution.
• Stock structure flexibility – Issue multiple classes of stock and authorize an unlimited number of shares, essential for equity planning and future financings.
• QSBS tax exemption – Potential to exclude up to $15 million in capital gains from federal tax with proper planning.

How Can You Be Eligible for This Tax Exclusion?

To meet the QSBS qualifications, you must:

• Acquire the stock directly from a qualifying C-corporation as an individual shareholder in exchange for money, property (but not stock), or services;
• Hold the stock for at least five years; and
• The company must be a “qualified small business.”

What Is a Qualified Small Business?

To be a qualified small business, your company must meet the following requirements:

• Your company must be a domestic corporation (preferably incorporated in Delaware) that has remained a C-corporation during the holding period of your stock (i.e., held for ≥ 5 years, with specific tiered holding period exclusions before then);
• The total gross assets of your company cannot exceed $75 million before the issuance of your stock; and
• During the holding period of your stock, at least 80% of your company’s assets must be used in the active conduct of a trade or business, other than:
  • professional services (e.g., law, engineering, etc.);
  • banking, insurance, financing, leasing and similar businesses;
  • farming;
  • mining or natural resource production or extraction; and
  • operating a hotel, motel, restaurant or another similar business.

Effective July 4, 2025, the One Big Beautiful Bill Act (OBBBA) introduced significant and founder-friendly changes to Section 1202 for QSBS:

1. Higher Asset Threshold
   • Increases corporate gross assets from $50 million to $75 million (indexed to inflation)
2. Larger Per‑Issuer Gain Cap
   • Boosts the per‑issuer exclusion from $10 million to $15 million (also inflation-adjusted)
3. Tiered holding‑period exclusions
   • 3 years held – 50% exclusion
   • 4 years held – 75% exclusion
   • 5+ years held – 100% exclusion
4. Inflation indexing
   • Both the $75 million threshold and the $15 million exclusion cap will grow with inflation after enactment

How Much Gain Can You Exclude?

If you acquire qualified small business stock on or after July 4, 2025, and hold it for at least three, four or five years, then 50%, 75 % or 100% of the gain, as applicable, may be excluded upon its sale. In this case, the $15 million exclusion cap (or 10x basis) will apply.

If you acquired qualified small business stock on or after September 28, 2010 and before July 4, 2025, and hold it for at least five years, then 100% of the gain may be excluded upon its sale. In this case, the $10 million exclusion cap (or 10x basis) will apply.

If you acquired the qualified small business stock before September 28, 2010, then other percentages will apply.

In addition, the amount of gain that you can exclude is currently limited to the greater of the applicable exclusion cap or ten times your basis in your shares of qualified small business stock. There are other details and intricacies relating to these tax considerations, so you should consult with a qualified tax professional for proper guidance before the sale of your stock.

Which Startup Entity Is Right for You – LLC vs S-corp or C-corp?

You will need to form a C-corporation (or an LLC taxed as a C-corporation) to take advantage of these tax benefits.

You might be considering an LLC or an S-corporation to avoid the double taxation of a C-corporation (i.e., taxation at the corporate level followed by the taxation of distributions at the individual shareholder level). However, with proper planning, the formation of a C-corporation may create the possibility of significant tax savings when QSBS-eligible shares are sold three, four, or five years after the original issuance, even though the formation of a C-corporation may not be as tax-efficient initially.

While LLCs and S-corporations can offer simplicity or pass-through tax treatment, they do not qualify for the QSBS tax exemption. Accordingly, no matter how long you hold your stock, you’ll pay capital gains tax when you sell.

A C-corporation may have some double-taxation tradeoffs, but if your company grows and exits, the potential QSBS exclusion can far outweigh those early tax costs. Proper planning now could mean millions in savings later.

Need help choosing the right entity for your startup?

We’ve helped hundreds of tech and biotech founders structure their companies to unlock long-term tax advantages, attract top-tier investors and stay acquisition-ready.

Schedule a call with our team today to get your startup set up right, from day one.