A C corporation is a legal structure for a business that is taxed separately from its owners. This structure offers significant legal protections and is favored by companies planning to reinvest profits or eventually go public. Unlike S corporations or LLCs, a C corp pays corporate income tax on its profits. If dividends are paid, shareholders are typically taxed on them at qualified dividend rates, creating the possibility of double taxation.

Key Features of C Corporations:

• Separate legal entity from its owners
• Unlimited number of shareholders (unlike the 100-shareholder S corporation limit)
• Ability to issue multiple classes of stock
• Profits taxed at the corporate level (flat 21% federal rate, Alabama 6.5%, as of 2025)
• Corporate losses do not pass through to shareholders. They are maintained within the corporation and carried forward.

Pros of a C Corporation:

• Limited liability protection for shareholders
• Easier access to capital through stock issuance
• Perpetual existence (business continues even if shareholders change)
• Greater credibility with vendors, customers, and lenders
• Eligibility for certain tax deductions is not available to pass-through entities (e.g., fringe benefits)

Cons of a C Corporation:

• Subject to double taxation (corporate tax + tax on dividends)
• More complex administrative and regulatory requirements
• Higher compliance costs (e.g., annual meetings, board resolutions, tax filings)
• Potential accumulated earnings tax if profits are not distributed

Favorable Section 1202 Gain Exclusion

One of the most attractive tax incentives for C corporations is the Section 1202 gain exclusion. This provision allows non-corporate shareholders to exclude up to 100% of the gain from the sale of qualified small business stock (QSBS) if certain conditions are met, including a five-year holding period and original issuance of the stock. The exclusion applies to gains up to $10 million or 10 times the shareholder’s basis, whichever is greater. To qualify, the C corporation must have gross assets of $50 million or less at the time of issuance and operate an active business in a qualified trade or business. Section 1202 can significantly reduce or eliminate capital gains tax on a successful exit, making the C corp structure particularly appealing to founders and early investors.

Generally, unless there are special circumstances, a C corporation is generally not the entity of choice. But, many businesses set up as a C corporation continue to operate and do not see the need to change, or the consequences of changing are too painful.

As always, if you have any questions, please don’t hesitate to contact a Dent Moses team member.