Advisors reassess C corp vs passthrough entity choice

Advisors are re-evaluating whether companies should operate as S corporations, partnerships, LLCs or C corporations after a July 2025 law that made the 20% Section 199A passthrough deduction permanent and expanded the Section 1202 exclusion for qualified small business stock. The change alters the tax comparison between passthrough entities and C corporations and follows the 2017 corporate tax rate cut that also affected entity planning.

Tax advisers report that the combination of a permanent 199A deduction and a broader 1202 exclusion has prompted owners and their advisors to rerun entity analyses. The analysis typically weighs tax costs, owner compensation, growth plans and how the business may be sold or transferred in the future.

Tony Nitti, partner who leads the S corporation team at EY US, observed that some businesses are electing to become C corporations at rates not seen since the 1980s. He added, “Do the analysis knowing what the rates will be on a go-forward basis, knowing that the individual rates are here to stay, and the corporate rate is here to stay and 199A is here to stay.”

Changing an entity type can create administrative tasks and tax consequences. Converting a C corporation to a passthrough generally requires distributing corporate assets, which can trigger taxable events. Moving a passthrough into a C corporation often means transferring assets into a newly formed corporate wrapper, a process advisers describe as simpler in many cases.

Ryan Vas Dias, director of tax at Compound Planning, noted, “It’s harder to get things out of a corporation than it is to put them in,” and he added that extracting appreciated assets from an S corporation can be especially difficult.

Registered investment advisers and other financial services firms face particular constraints. Many may not qualify for the full 199A deduction or for the Section 1202 exclusion, limiting the direct tax benefits that drive some entity choices. Entity form also shapes how owners receive compensation, how new partners are admitted and how the firm is structured for a sale or succession.

Advisers say the permanence of 199A and the clarified tax rates provide more stable inputs for modeling after-tax income and sale proceeds than were available earlier this decade. At the same time, some tax professionals note that future legislation could change assumptions, so comparative models often show multiple scenarios.

In practice, advisers report revisiting client elections, running comparative tax models and discussing the operational and transactional consequences of conversions. Those reviews typically consider current tax rates, eligibility for deductions and exclusions, the mechanics of moving assets between entity types and the client’s plans for growth, capital raising and eventual exit.