One Big Beautiful Bill Act and Choice of Entity: What Business Owners Should Revisit
Updated: 11 hours ago
Circular 230 / general information notice. This article is general information only. It is not tax, legal, or accounting advice. Reading it does not create an attorney-client relationship. Tax results depend on your facts and on law that can change. Consult your own attorney and CPA before taking any action. This article was not written to be used, and cannot be used, to avoid tax penalties.
The One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, locked in several rules that sit at the center of every choice of entity discussion: a permanent 21% federal corporate rate backdrop, a permanent 20% Section 199A deduction for qualifying pass-through income, permanent 100% bonus depreciation for many newly acquired assets, a temporarily higher individual SALT deduction cap, expanded qualified small business stock (QSBS) rules under Section 1202, and restored current expensing for domestic research under new Section 174A. For founders, operating companies, and investors, the practical question is whether the entity form you are using still fits how you distribute cash, reinvest earnings, and plan an exit.
Why permanence changes the choice of entity memo
For years, choice-of-entity analysis was partly a sunset puzzle. Pass-through owners asked whether Section 199A would still be there. Capital-intensive businesses asked how far bonus depreciation would phase down. Founders weighing a C corporation asked whether QSBS was worth the operating constraints if timelines were tight.
When major inputs become permanent or more durable, the analysis shifts from "wait and see" to "model the steady state." That does not make one form universally better. It does mean existing companies should re-run the comparison with current numbers rather than relying on a memo written when sunsets still dominated the conversation.
C corporation, S corporation, and LLC taxed as a partnership
A C corporation remains subject to the 21% federal corporate income tax. Distributions to individual shareholders are generally taxed again at the shareholder level. That structure can still be acceptable when the company will reinvest heavily for years, when QSBS is a meaningful part of the exit plan, or when investors expect corporate form.
An S corporation or an LLC taxed as a partnership generally pushes taxable income out to owners. Subject to limitations, qualifying owners may claim the Section 199A deduction of up to 20% of qualified business income. The OBBBA made that deduction permanent. For many profitable pass-through businesses that distribute regularly, that permanence strengthens the case for remaining outside C corporation form, assuming the business qualifies and the owners' overall tax picture supports it.
The right answer still depends on distribution policy. A business that retains almost everything looks different from a business that pays owners every quarter. Reinvestment and exit assumptions matter as much as the headline rates.
When QSBS can tip the scale toward a C corporation
Section 1202 QSBS treatment can make C corporation stock attractive for founders and certain investors when the company and the stock meet the statutory tests. Under the OBBBA, stock acquired after the July 4, 2025 enactment date can use a tiered exclusion: 50% after at least three years, 75% after at least four years, and 100% after five years or more. The per-issuer gain exclusion cap for that new stock is generally the greater of $15 million or 10 times basis (with later inflation adjustments), and the corporation's aggregate gross assets threshold is generally $75 million (also later indexed).
Those enhancements are powerful, but they are not automatic. QSBS still requires original issuance, active qualified business activity, gross-assets discipline, and careful attention to redemptions and other disqualifying patterns. Stock issued on or before the enactment cutoff generally remains under the older framework. Founders already in LLC or S corporation form should not assume a late conversion into a C corporation cleanly recreates QSBS benefits.
For PE-backed and venture-backed companies, QSBS often appears in term-sheet and exit conversations. Counsel and the company's tax advisors should pressure-test eligibility early, not in the week before a sale.
Bonus depreciation and domestic research expensing
The OBBBA permanently reinstates 100% bonus depreciation for qualified property acquired after January 19, 2025. That can improve near-term cash tax results for equipment-heavy businesses and can influence purchase-price allocation preferences in asset deals.
Separately, new Section 174A generally allows current expensing of domestic research or experimental expenditures for taxable years beginning after December 31, 2024, while foreign research generally remains subject to longer capitalization. Transition options exist for remaining unamortized domestic research amounts from the 2022 through 2024 capitalization period. Method choices and elections should be calendared with the CPA.
SALT, Texas businesses, and other states
For individuals, the OBBBA temporarily raises the federal state-and-local-tax deduction cap to $40,000 beginning in 2025 (with annual adjustments through 2029 and a phaseout for higher-income taxpayers), then returns the cap to $10,000 in 2030. Pass-through owners who itemize should model both the temporary window and the reversion.
Texas adds a different layer. Texas has no personal income tax. Texas does impose a franchise (margin) tax that can apply to LLCs and corporations alike, so "Texas LLC versus Texas corporation" is rarely decided by franchise tax alone. Even so, many Texas-based companies still need a multi-state analysis: remote employees, customers, inventory, or affiliates can create exposure elsewhere. Entity choice and operating footprint should be reviewed together.
Conversion traps deserve a slow walk
Changing entity form is not a paperwork exercise. Moving from C to S, S to C, partnership to corporation, or corporation to partnership can implicate built-in gains concepts, accumulated adjustments account mechanics, unrecognized receivables and inventory issues, and reorganization rules that only work when the steps are sequenced correctly. A conversion undertaken to chase QSBS, Section 199A, or investor preference can create the very tax cost the parties hoped to avoid.
Before any conversion, owners should ask the CPA and counsel to map current inside and outside basis, distribution history, planned redemptions, related-party ownership, and the intended timeline to an exit.
A practical checklist for owners and boards
Re-run the C versus S versus partnership comparison with permanent Section 199A and current distribution assumptions.
If QSBS matters, confirm issuance dates, gross-assets headroom, qualified business activity, and redemption history before issuing new stock or converting.
Inventory capital expenditure plans against permanent 100% bonus depreciation eligibility and timing.
With the CPA, review Section 174A method posture and any transition elections for previously capitalized domestic research.
Model individual SALT exposure through 2029 and after the 2030 reversion for owners who itemize.
Map multi-state footprints even if the headquarters is in Texas.
Do not convert entity forms until tax, corporate, and financing documents are reviewed as one package.
Calendar CPA and legal check-ins when ownership, fundraising, or exit timing changes.
If you are still choosing a form, start with choosing a business entity in Texas. Series LLCs and beneficial ownership reporting are covered separately. For help revisiting the memo, see our business law services.
How I can help
I advise businesses on entity formation and governance, commercial contracts, financings, and transactions. On tax-sensitive entity decisions, I work alongside the client's CPA rather than replacing that relationship. The goal is a coherent plan: corporate documents that match the tax model, investor expectations that match the charter, and conversion steps that do not create avoidable traps.
Want to run your scenario by me? info@robertsandwillie.com or (469) 910-4017. Sending a message does not create an attorney-client relationship.
Disclaimer. This article is for general information only and is not tax, legal, or accounting advice. It does not create an attorney-client relationship. Tax law changes and depends on your specific facts. Do not act on this article without consulting your own attorney and CPA. This article is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable law. Attorney Advertising. Roberts & Willie, PLLC, Dallas, Texas; Trenton Roberts, responsible attorney.
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