When a C corp makes sense

If your business pays out what it earns to you, its owner, a C corp is almost always the most expensive way to be taxed. The company pays tax on its profit. Then you pay again when that profit reaches you as a dividend. So the C corp only earns its place in a few situations. Maybe the profit is staying in to pay for growth, or outside investors need it. Or you're hoping to sell years from now and Section 1202 could make the gain tax-free.

The 21% rate

A C corp pays its own federal income tax at a flat 21% of taxable income. That is Section 11(b), and Publication 542 says the same. There are no brackets. Its return is Form 1120. The Form 1120 instructions want it by the 15th day of the 4th month after the tax year ends, so a calendar-year company files by April 15.

States add their own corporate income tax on top in most places.

The double tax

What the company has left after its 21% can come out to you as a dividend. You pay tax on that dividend again on your personal return. Topic 404 says qualified dividends are taxed at the lower capital gain rates. Rev. Proc. 2025-32 sets the 2026 bands:

Earn more than $200,000 of modified AGI ($250,000 joint) and dividends pick up the 3.8% net investment income tax as well.

Salary is different. The company deducts what it pays you, so salary gets taxed once, as wages. That's why a lot of owners pull profit out as salary instead. It isn't free, though: salary carries payroll tax, and it has to be reasonable for the work you do.

Worked example: $200,000 of profit, paid out or kept

Picture a single owner who already pays themselves $80,000 in salary from the C corp. Once that salary is deducted, the company still shows $200,000 of taxable profit for 2026.

Paid out, the profit carried 33.6% in federal tax on top of what the salary already paid. Kept in, it carried 21%, and $158,000 stays in the business for hiring or equipment. The dividend tax isn't gone, only deferred until the money comes out or the company is sold.

If you need the cash personally, the C corp costs you. If the business needs it, the 21% rate can be a good deal.

Keeping too much: the accumulated earnings tax

You can't defer forever. Park money in the company just to dodge dividend tax and Section 531 hits it with a 20% accumulated earnings tax, charged on profit held beyond the reasonable needs of the business.

There's a cushion. Thanks to the credit in Section 535(c), the first $250,000 of accumulated earnings is generally safe. A corporation mainly doing services in health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting gets $150,000 instead. Past those amounts, have written plans saying what the money is for: a second location, say, or new equipment.

QSBS: Section 1202

Founders who plan to sell pick a C corp mostly because of Section 1202. Sell qualified small business stock and some or all of the gain can be excluded. Public Law 119-21, the 2025 tax law, widened the break for stock acquired after July 4, 2025. Under Section 1202 as amended:

The basics, all from the statute:

• The company must be a domestic C corporation. LLCs and S corps don't qualify.
• You must get the stock at original issue, from the company, for money, property or services.
• The company's aggregate gross assets must be no more than $75 million when the stock is issued. The Schedule D instructions note the limit was $50 million for stock issued on or before July 4, 2025.
• At least 80% of its assets must be used in an active business.
• The excluded gain per company is capped at the greater of $15 million (up from $10 million) or 10 times your basis in the stock.

Many fields are excluded, including health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, banking, insurance, farming, and hotels and restaurants. A consulting firm gets no QSBS benefit. A software company usually can.

When a C corp is the right call

• You plan to raise outside money. The Form 2553 instructions rule out S status for a company with corporate or partnership shareholders or more than one class of stock, which shuts out most investment funds.
• You keep most profit in the business to grow, and your personal rate would be well above 21%.
• You plan to sell in five years or more and the business qualifies for QSBS.

For an owner who takes most profit home, the double tax wins out. Run your numbers in the calculator: at $100,000 of profit in Texas, the C corp line comes out higher than the LLC and the S corp lines.