The One Big Beautiful Bill Act changed the calculus on one of the most consequential decisions a business owner can make: how their business is structured for tax purposes. The permanent extension of the 20% Section 199A qualified business income deduction strengthened the case for pass-through entities. The expansion of the Section 1202 qualified small business stock exclusion to $15 million with a reduced holding period made C-Corporations more attractive for founders planning to sell. And the permanent reinstatement of 100% bonus depreciation affects how losses flow through every type of entity differently.

AE Tax Advisors, a boutique Montana-based tax advisory firm, has been restructuring client entities since the law’s enactment, and the firm’s position is clear: the right answer depends entirely on where you are, where you are going, and how much you earn. The entity structure that minimizes taxes for a $500,000-per-year service business with no exit plan is entirely different from the structure that minimizes taxes for a technology company building toward a $10 million sale.

About AE Tax Advisors

AE Tax Advisors works exclusively with business owners earning $500,000 or more annually. Entity structure is the foundation upon which every other tax strategy is built, and the firm evaluates it as the first step in every engagement. The analysis is not a one-time exercise. AE Tax Advisors reassesses entity structure annually as the client’s income, growth trajectory, and exit timeline evolve.

The LLC Default and Its Hidden Cost

A single-member LLC taxed as a sole proprietorship is the default starting point for most businesses. It offers simplicity and flexibility, but it carries a significant tax cost: the entire net profit is subject to self-employment tax at 15.3%. For a business owner netting $300,000, self-employment tax alone can reach $25,000 to $35,000. At $500,000, it climbs to $35,000 to $45,000. At $750,000, the figure approaches $50,000. These are taxes paid on top of federal and state income tax.

AE Tax Advisors generally recommends that business owners consider moving beyond the default LLC structure once net income consistently exceeds $80,000 to $100,000 annually. Below that threshold, the compliance costs of a more complex structure may exceed the savings. Above it, the math favors action. The firm has found that the majority of business owners earning $500,000 or more who arrive at the firm as sole proprietors have been overpaying self-employment tax by $20,000 to $40,000 per year for multiple years.

The S-Corp Advantage for Established Businesses

The S-Corporation is the entity AE Tax Advisors recommends most frequently for established business owners with consistent income. The S-Corp allows the owner to pay themselves a reasonable salary subject to payroll taxes and take the remaining profit as distributions not subject to self-employment tax. For a business owner earning $500,000 with a reasonable salary of $150,000, the remaining $350,000 in distributions avoids the 15.3% self-employment tax, producing annual savings of approximately $25,000 to $30,000.

The OBBBA strengthened this position by making the Section 199A deduction permanent. Because the S-Corp structure inherently generates W-2 wages through the owner’s salary, it naturally satisfies one of the key QBI deduction limitations, a synergy the LLC structure lacks. AE Tax Advisors calibrates each client’s salary to serve dual purposes: minimizing self-employment tax while maximizing the Section 199A deduction. The firm also coordinates the S-Corp structure with pass-through entity tax elections in over 30 states, converting individually capped SALT deductions into fully deductible entity-level expenses. For clients in states like California, New York, and New Jersey, the PTE election alone can produce $15,000 to $30,000 in additional federal savings on top of the self-employment tax reduction.

The S-Corp’s limitations are few but important: one class of stock, a 100-shareholder cap (all U.S. citizens or residents, certain trusts, or estates), and no eligibility for the Section 1202 QSBS exclusion. For owners planning a long-term hold with no near-term exit, these limitations are rarely binding.

The C-Corp for Founders Planning an Exit

Before the OBBBA, the C-Corporation was disfavored for most small businesses because of double taxation: corporate income is taxed at 21% at the entity level, and distributions are taxed again as qualified dividends. The total effective rate on distributed earnings can exceed 40%. The OBBBA changed the analysis by expanding the Section 1202 qualified small business stock exclusion. For C-Corp stock issued after July 4, 2025, the per-shareholder exclusion cap increased from $10 million to $15 million, indexed for inflation after 2027. The gross asset threshold rose from $50 million to $75 million. A new tiered holding period allows 50% exclusion after three years, 75% after four, and 100% after five.

For a founder who builds a C-Corp, holds the stock for five years, and sells for $15 million, the entire gain can be excluded from federal income tax. AE Tax Advisors evaluates C-Corp status for every client with a business that could realistically be worth $5 million or more within a five to ten-year horizon. The firm models the ongoing cost of double taxation against the potential value of a tax-free exit, and for high-growth businesses the math often favors the C-Corp decisively. For some clients, a hybrid approach, an S-Corp for current operations and a C-Corp for a new venture, captures benefits from both structures. AE Tax Advisors has implemented this hybrid model for clients who want to minimize current-year taxes on their operating income while preserving the QSBS exclusion for a high-growth subsidiary. The key is structuring the entities so that each one serves its intended tax purpose without creating unnecessary complexity or compliance risk.

How AE Tax Advisors Makes the Decision

The firm models three to five scenarios for each client at their current income level and projected growth, comparing total lifetime tax cost across entity structures. The analysis accounts for self-employment tax savings from S-Corp status, the Section 199A deduction under the permanent OBBBA rules, the potential QSBS exclusion for C-Corp founders, state-level PTE elections, and retirement plan design which differs by entity type. For most established service businesses with no near-term exit plan, the S-Corp wins. For high-growth companies with a realistic five-year exit horizon, the C-Corp’s QSBS advantage can be worth millions.

AE Tax Advisors emphasizes that entity structure is not a set-and-forget decision. A business that starts as an S-Corp may benefit from adding a C-Corp subsidiary as it develops new products. A C-Corp founder who decides not to pursue a sale may benefit from converting to S-Corp status. The firm revisits the analysis annually and restructures when the math supports it.

What This Means for Business Owners Who Have Not Reviewed Their Structure

The entity structure that was optimal in 2024 may not be optimal in 2026. The OBBBA’s permanent QBI deduction, expanded QSBS rules, reinstated bonus depreciation, and modified SALT provisions all affect the entity analysis. AE Tax Advisors recommends that every business owner earning $500,000 or more have their entity structure reviewed in light of the new law, and the firm continues to help clients restructure for maximum tax efficiency under the current code. The cost of an entity structure review is a fraction of the savings it can produce, and for business owners who have not revisited their structure since the OBBBA’s enactment, the opportunity cost of inaction grows with every filing season.

To learn more about AE Tax Advisors, visit: https://www.aetaxadvisors.com