Most major companies and many smaller companies are treated as C corporations for US federal income tax purposes.
Unlike entities subject to pass-through taxation, C corporations are directly liable for US federal income tax. As a result, income of a C corporation is generally taxed twice: first as corporate income tax paid at the entity level and again at the shareholder level (as ordinary income or capital gain, depending on the nature of the income).
Depending on the circumstances, C corporations can nonetheless be a tax-efficient option. For example, only stock issued by certain C corporations can be eligible for the benefits afforded to “qualified small business stock” (“QSBS”) under US tax law. Also, investment funds are often restricted from investing in pass-through entities because they can generate certain types of taxable income for which certain of the funds’ ultimate investors may be sensitive. Organizing as a C corporation generally avoids the possibility of this income and can simplify the process of seeking institutional funding.
Startups often organize as C corporations for non-tax reasons, such as operational simplicity, limited liability for investors, and because the venture capital investment community is most familiar with the C corporation entity form.
Last reviewed: October 25, 2022