Key Changes Under OBBBA Affecting Entity Setup
The One, Big, Beautiful Bill brought sweeping changes, especially for tax rates, deduction limits, and definitions relevant to businesses. Here are some entity-structure considerations you must evaluate:
| Feature | C-Corporation (C-Corp) | S-Corporation (S-Corp) / LLC taxed as pass-through |
|---|---|---|
| Tax rate environment | Flat about 21%; shields owners from individual tax rates, which now can go up to 37% or more for high income under revised brackets. (irs.gov) | Income flows through to individuals who are taxed at steep individual brackets. Distributions to owners are not taxed at corporate level but may be subject to self-employment taxes if LLC member. |
| Qualified business income (QBI) deduction | Not applicable; earnings are taxed at corporate level. | Still potentially eligible for up to 20% deduction subject to limitations on income, wages, and capital investment (but OBBBA has created some adjustments in thresholds) – important to model. |
| Flexibility of ownership | More rigid, especially regarding stock structure and investors’ expectations. | LLCs offer flexibility but can trigger self‐employment tax and complicate state filings. |
What to Consider Before Choosing
- Future investment & exit: C-Corps are often preferred in startup capital raises. Also, OBBBA’s changes to capital gains treatment, opportunity zone rules (as per IRS Notice 2026-40) affect C-Corp investments. (irs.gov)
- Income timing & distribution: S-Corps allow precise salary vs dividend splits; LLCs may have less structure, but self-employment tax exposure is higher. Under OBBBA, penalties for excess executive compensation (for certain non-profits) have also been expanded. (irs.gov)
- Complexity & compliance cost: C-Corps have more rigid tax filings and double taxation issues; LLC/S-Corp require handling K-1s and potential multi-state filings.
Entity Setup Checklist
- Register in a state (or states) where you’ll operate; check state-level taxes and how they conform to federal changes under OBBBA.
- Apply for EIN, prepare bylaws or operating agreements reflecting whether you’ll use election for S-Corp status, if permitted.
- For S-Corp: file Form 2553 timely (often within 2½ months after tax year starts) to be effective for the desired year.
- Consider payroll tax obligations; ensure “reasonable compensation” under S-Corp if owners work in the business.
Case Example
Startup “GreenWidget LLC”: 2026 expected taxable net income $500,000; owners located in California. Because of high federal individual rate (37%), C-Corp’s flat 21% plus dividend tax may lead to combined rates near or above 40%. An S-Corp or LLC taxed as pass-through may pay higher payroll/self-employment taxes, but proper salary + distributions split and QBI deduction may result in lower federal plus state combined tax burden.
* Choosing structure is one one-time but long-term impacting decision. With OBBBA’s shifting rules—especially for top brackets, opportunity zones, and executive compensation—run your numbers carefully.