A C corporation is a corporation taxed as a separate taxpayer under the Internal Revenue Code. The company pays entity-level tax on its profits under IRC Section 11, and its shareholders pay tax again when those profits are distributed as dividends. Lawyers and founders often call it a C-corp.

If you plan to raise venture capital or claim the QSBS tax break, you almost certainly need to be a C corporation, and usually a Delaware one. Getting the entity right at formation avoids a painful and taxable conversion later.

What makes a C corporation: entity-level tax and double taxation

The defining feature of a C corporation is that it is a separate taxpayer. Under IRC Section 11, the corporation pays federal income tax on its taxable income at a flat rate, currently 21 percent. When the corporation then distributes after-tax profits to shareholders as dividends, the shareholders pay tax on those dividends on their own returns. The same dollars are taxed twice, which is why people call it double taxation. A pass-through entity such as an S corporation or an LLC avoids the entity-level layer, but pass-through structures do not work for most venture-backed startups.

Why VCs and QSBS favor the Delaware C corporation

Venture investors expect a Delaware C corporation for practical reasons. Many funds cannot hold pass-through interests, because the income would flow through to their tax-exempt and foreign limited partners. A C corporation cleanly issues preferred stock with the rights investors want, and Delaware corporate law is the deep, predictable body of law that investors and their counsel already know.

The tax code reinforces the choice. Qualified Small Business Stock under IRC Section 1202 can exclude a large share of gain from federal tax on a sale, but Section 1202(d)(1) requires that the issuing company be a domestic C corporation. Stock in an LLC or an S corporation cannot be qualified small business stock. Congress amended Section 1202 in 2025 (Public Law 119-21), raising the aggregate gross assets ceiling to $75 million and adding a tiered holding period for stock issued after July 4, 2025, but the C corporation requirement did not change.

Getting the structure right at formation

Incorporate as a Delaware C corporation early, issue founder common stock at a nominal price while it is cheap, and file an 83(b) election within 30 days if your shares are subject to vesting. Converting from an LLC to a C corporation later can be done, but it is more expensive, can reset your QSBS holding clock, and sometimes triggers tax.

This is general information, not tax advice.