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Key Takeaways Recent tax changes have made it worthwhile for many business owners to revisit their entity structure, as the long-term tax advantages of a C corporation may now outweigh the traditional benefits of pass-through entities.
The right business structure depends on your growth plans, succession strategy and exit timeline, making proactive tax modeling and planning essential before making a decision.
Many entrepreneurs spend years focused on growing revenue, hiring talent and winning customers. But one of the most important decisions affecting how much wealth you ultimately keep may have nothing to do with operations at all: your business’s tax structure.
Recent changes under the One Big Beautiful Bill Act (OBBBA) have altered the calculus for many business owners, particularly those operating as pass-through entities such as S corporations, partnerships and limited liability companies (LLCs). While these structures remain popular — and for good reason — the tax advantages that once made them the default choice may not be as clear-cut as they were in the past.
According to the Brookings Institution, as many as 95% of businesses are organized as pass-through entities. For some owners, that structure may still be the best fit. But for others, the combination of lower corporate tax rates and expanded Qualified Small Business Stock (QSBS) opportunities under the OBBBA could make a traditional C corporation worth a fresh look.
A pass-through entity does not get taxed at the company level. Instead, all income “passes through” to the owner’s individual tax return and is taxed there. Pass-through entities have many advantages over a traditional corporation (or C corporation). They’re easier to set up, have fewer compliance requirements and allow owners to take cash out of their business without dividend taxation. In addition, the OBBBA modified provisions related to Section 199A, known as the Qualified Business Income Deduction, which may further reduce taxable income for certain pass-through businesses.
However, depending on your income, growth plans and long-term exit strategy, remaining a pass-through entity could result in a significantly higher tax bill than operating as a C corporation.
That’s because, again, due to the OBBBA, the corporate tax rate is maximized at 21%. However, the tax rate at the individual level can be as high as 37%. Which means that if your company is still a pass-through, and you’re making more than $640,000 per year, you may be paying twice the amount of taxes you would be paying if your company were a C-Corporation. Even if you’re making less than the top amount, individual tax rates could still be above 30%, with state taxes adding to the bill.
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