C corporation

Every corporation is a C corporation unless it has a valid S corporation election for the year. C and S are federal tax labels, so a state charter does not say which one a company is. An LLC can elect on Form 8832 to be taxed as a corporation. Unless it also elects S status, it is then a C corporation.

A C corporation files Form 1120 every year, with or without revenue. Its taxable income is taxed at a flat 21%, the federal rate since 2018. Profit paid out as dividends is taxed a second time, on the shareholders’ own returns. Qualified dividends are taxed at up to 20%, plus the 3.8% net investment income tax for higher earners. Profit the corporation reinvests faces no second tax until it is paid out or shareholders sell.

Startups that plan to raise from venture funds are usually C corporations. A venture round typically brings in preferred stock, bought by a fund set up as a partnership or LLC. An S corporation can have only one class of stock and no partnership shareholders. Preferred stock or a fund investor would therefore end its S status. Only stock in a US C corporation can be qualified small business stock (QSBS), whose gain can be excluded from federal tax.