When it comes to selling a business, most business owners are aware that their entity structure is a critical factor when it comes to their return when they exit. However, the trap many fall into is assuming that the structure they are currently in is the best for their situation.
The reality is, more often than not that structure is NOT optimal and opportunities are missed to make impactful changes when needed - which is often many years ahead of that sale.
Let's look at the pros and cons of different entity type, ranking them from worst to best when it comes to exit - particularly in light of the One Big Beautiful Bill and the changes it brings.
1. Sole Proprietorship (worst)
- Advantages:
- Simple and inexpensive to set up and maintain.
- Owner has complete control over the business.
- Disadvantages:
- No legal separation between the owner and the business, meaning personal assets are not protected from business liabilities.
- The sale of a sole proprietorship can only be structured as an asset sale, which may lead to higher taxes for the seller.
- Not eligible to issue QSBS.
2. S Corporation (S Corp)
- Advantages:
- Pass-through taxation, avoiding the double taxation faced by C Corps.
- Provides liability protection for owners, similar to C Corps.
- Disadvantages:
- Restrictions on the number of shareholders (limited to 100) and ownership types (shareholders must be US citizens or residents).
- Only one class of stock is permitted, which may limit flexibility in attracting investors.
- Not eligible to issue QSBS and therefore cannot benefit from the gain exclusion in the One Big Beautiful Bill.
3. Limited Liability Company (LLC)
- Advantages:
- Combines the limited liability protection of a corporation with the pass-through taxation of a partnership or sole proprietorship.
- Offers flexibility in management structure and profit allocation.
- Disadvantages:
- Generally treated as a partnership for tax purposes unless a specific election is made to be treated as a C Corp.
- Conversion to a C Corp might be necessary to leverage the full benefits of tax advantages and gain exclusions in the One Big Beautiful Bill, and timing is crucial to maximize QSBS benefits.
4. C Corporation (C Corp Best)
- Advantages:
- Unlimited shareholders and stock classes, making C Corporations attractive for raising capital.
- Provides liability protection for owners, shielding personal assets from business debts and lawsuits.
- OBBBA Benefits: A key advantage for C Corps under the OBBBA is the potential for significant tax savings through Section 1202, also known as the Qualified Small Business Stock (QSBS) gain exclusion.
- The OBBBA has made several favorable changes for QSBS issued after July 4, 2025:
- Increased Gain Exclusion Cap: The per-person, per-issuer exclusion amount increases from $10 million to $15 million and is indexed for inflation.
- Increased Gross Asset Threshold: The maximum asset threshold for a company to issue QSBS increases from $50 million to $75 million, allowing more businesses to qualify.
- Tiered Holding Period: A tiered system of gain exclusion is introduced, offering a 50% exclusion for QSBS held at least three years, 75% for four years, and retaining the 100% exclusion for stock held five years or longer.
- If your company qualifies for QSBS, a C Corp structure could offer substantial tax savings on the sale of the business.
- Disadvantages:
- Double Taxation: C Corporations are subject to double taxation, meaning profits are taxed at the corporate level and again when dividends are distributed to shareholders.
- More complex administrative and regulatory requirements compared to other structures.
What Does It All Mean: Capitalizing on the OBBBA
If you're a business owner or investor, the changes enacted by the One Big Beautiful Bill could mean significantly lower taxes when you sell your company. But, the key is to structure your business correctly now to take advantage of these benefits. Making the right choices about your business structure can greatly impact your financial outcome when it's time to exit.
Planning is key, don't leave money on the table.
Understanding these new rules and how they apply to your specific situation is essential. The reality is, for most, the ideal structure involves multiple legal entities. But with the right partner and the right plan, the choices you make today will affect your bottom line tomorrow.
If you are planning to say today, or any time in the next 3 to 5 years, let our team prepare you and maximize your return.