Don’t Think For a Minute That C Corporations Are Dead

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1. Feature: Don’t Think For a Minute That C Corporations Are Dead (4 min read)

2. From the Archive: How To Assign Your LLC Ownership Interest To Your Revocable Trust. Read it here.

It’s Thursday. Keep pushing toward what you set out to achieve this week.

-TCoL

Missed our last feature article? Growth Without a Lease: The Latest Virtual Offices Help Position and Expand Your Business. Read it here.

Whether you’re buying a C corporation or considering forming one from scratch, here’s a tax strategy that might surprise you: the C corporation isn’t dead and it just may be the smartest structure for your next business.

C corporations have long been dismissed by small business owners in favor of LLCs, thanks to their simplicity and pass-through taxation. But now that Section 1202 of the Internal Revenue Code has been updated and expanded in July 2025, it’s time to reconsider. That said, this topic is highly nuanced. What follows is intended to spark awareness and not to serve as legal or tax advice.

Old C Corps, New Gold

Many of today’s popular target businesses (HVAC, plumbing, electrical services, vet clinics, dental practices, etc.) were set up as C corps years ago. If you’re looking at an acquisition, there’s a good chance the stock you’re buying may qualify for the Qualified Small Business Stock (QSBS) gain exclusion.

Here’s the kicker: many of these sellers don’t even know Section 1202 exists. And if their stock qualifies, they could exclude millions in capital gains. That could be the extra push you need to close the deal or negotiate better terms.

But beware: just because the business is a C corp now doesn’t mean the stock qualifies. If the corporation ever elected S corporation status, the stock issued during that time cannot qualify for QSBS treatment even if the company later reverted to a C corp.

Also, if stock was originally purchased from a shareholder, as opposed from the corporation directly, it does not qualify for QSBS.

Why New Owners Should Still Consider C Corps

Plenty of new founders default to forming LLCs. That’s not always wrong, but it's often automatic, especially with online services that push one-size-fits-all LLC templates. If you:

• Plan to expand into multiple states

• Don’t want to file personal income tax returns in multiple states

• Want to raise capital through equity

• Are building for a long-term hold or exit

• Prefer to retain earnings instead of distributing them every year

Then forming a C corporation should at least be considered.

With the updated Section 1202 rules (which apply only to stock issued after July 4, 2025), holding C corporation stock for as little as three years may allow you to exclude a large percentage of your gain on exit. And we’re not talking about deferral. This is permanent tax savings, if the requirements are met.

Important Clarification: The enhancements made by the One Big Beautiful Bill Act (OBBBA) apply only to QSBS issued after July 4, 2025. If your stock was issued on or before that date, it is subject to the pre-OBBBA provisions; namely, a flat 5-year holding period, a $10 million per-taxpayer cap (or 10× basis), and a $50 million gross asset threshold. The new tiered exclusion percentages, $15 million cap, and $75 million gross asset threshold do not apply retroactively.

Section 1202: In Plain English

The Qualified Small Business Stock (QSBS) exclusion under Section 1202 lets non-corporate taxpayers (individuals, trusts, estates, partners in pass-through entities) exclude capital gain from the sale of QSBS.

Here's what makes it valuable:

If you buy or receive stock from a C corp that:

• Has less than $50M in gross assets at issuance ($75M only applies if stock is issued after July 4, 2025)

• Operates in an active trade or business (not a passive or excluded activity)

• Issues stock directly to you—at original issuance in exchange for cash, property (excluding stock), or services

And you hold it for the required time—

• 3 years (50% exclusion for post-July 4, 2025 stock only)

• 4 years (75% exclusion for post-July 4, 2025 stock only)

• 5 years or more (50%, 75%, or 100% exclusion for pre-July 4, 2025 stock depending on acquisition date: 50% if acquired August 11, 1993–February 17, 2009; 75% if February 18, 2009–September 27, 2010; 100% if September 28, 2010–July 4, 2025; 100% exclusion for post-July 4, 2025 stock—though the cap and eligibility thresholds differ)

then you may be eligible to exclude gain up to $10M–$15M per corporation or 10× your basis, depending on when your stock was issued.

Exceptions exist for certain transfers like gifts, inheritance, partnership distributions, and tax-free reorganizations. But secondary purchases do not qualify.

This works for founders too; especially those who start lean and issue stock early while value is low.

Why It Matters in 2025 and Beyond

The July 2025 changes (informally referred to as the “One Big Beautiful Bill Act”) apply prospectively:

• Raised the cap to $15M (for stock issued after July 4, 2025; indexed starting in 2027)

• Shortened the holding period to allow partial exclusions earlier (applies only to post-July 4, 2025 stock)

• Expanded the gross asset threshold to $75M (only for post-July 4, 2025 stock)

If your stock was issued before this date, the old rules apply.

But, It’s Not All Sunshine

C corps are still subject to double taxation on earnings. That means profits taxed at the corporate level, and again if distributed as dividends. So, if your goal is to take out most profits every year, a pass-through like an S corp or LLC might still be better.

But if your plan is to build, hold, reinvest, and eventually exit, then QSBS gives you a powerful reason to think twice before defaulting to an LLC.

Also note: Not all states conform to Section 1202. California, Pennsylvania, and Mississippi do not. Always consult an experienced tax advisor.

And remember: QSBS can be disqualified by things like stock redemptions (if the company buys back too much of its own stock near the time of issuance), or if you hedge your position before the holding period ends. Even gifting QSBS to a partnership can create issues. These details matter and failure to comply with them can render the entire exclusion unavailable.

What Should You Do?

• Buying a C Corp? Ask the seller if they ever issued QSBS and whether the company ever operated as an S corporation. Investigate thoroughly.

• Forming a New Company? Don’t rule out a C corp. Map your goals against the trade-offs.

• Planning Your Exit? Structure your ownership to meet the requirements early. That includes holding periods, original issuance rules, redemption limitations, and avoiding disqualifying transactions.

• Giving Stock to Others? You can gift QSBS to family or trusts.

• Exiting Early? Consider a rollover into new QSBS under Section 1045. The rollover process is complicated, so, consult a tax attorney or CPA.

Final Thought

C corporations aren’t dead. They’re just misunderstood.

The updated QSBS exclusion is one of the most generous tax benefits in the Code. It rewards long-term builders, strategic acquirers, and careful planners. 

Whether you're structuring your next startup or buying a boring old HVAC company that was founded in 1985, don’t skip the QSBS conversation.

Disclaimer: This article is for informational purposes only and is not legal or tax advice. The QSBS rules are highly complex and eligibility can be lost due to technical missteps. Always consult a qualified tax attorney or CPA before taking action.

Have an interesting business question and need a free bit of advice? Send your question to [email protected]. No confidential info, please!