Entity structure has become an exit decision, not a formation one

The client who formed the LLC years ago, files the same return every April, and has never been asked whether the structure still fits is the client Financial Planning had in mind on Sept. 24, when it reported that the tax law enacted in July 2025 changed the equation for business entity selection. That covers a large share of owner-operator households, because anyone who chose a corporation, a partnership, or something else at formation has been operating on a decision the tax code has since revisited twice, in the 2017 law and again last year.

Two changes do most of the work: the 20% Section 199A deduction on qualified business income for pass-through owners, temporary when it arrived in the 2017 law, is now permanent, and the July law expanded the exclusion that lets individuals avoid tax on qualified small business stock under Section 1202, a provision the outlet characterizes as a benefit of becoming a corporation. The cut to the corporate tax rate in the 2017 law remains the third leg of the comparison.

Tony Nitti, a Denver-based partner who leads the S corporation team in the National Tax Department at EY US, told the outlet that the tax industry is watching businesses move willingly into C corporation status in numbers it has not seen since before 1986, and that anyone advising clients on choice of entity has to set aside the reflex that a pass-through is always the right answer. He is measured about the statute itself: no single provision in the reconciliation bill was so sweeping that it pushes taxpayers in one direction, because the legislation carried benefits on several sides, and what he asks for instead is arithmetic run on the rates as they now stand, with individual rates, the corporate rate, and 199A all treated as permanent. That permanence is the real change, because a question advisors used to defer until a sunset appeared now has to be answered on today's numbers.

The question clients ask second, and ought to ask first, is what it costs to change your mind, because Financial Planning lays out the mechanics: moving from a C corporation to a pass-through requires distributing the assets first, and that distribution carries tax consequences, while moving between pass-through types is more flexible. Ryan Vas Dias, the Kirkland, Washington-based director of tax at Compound Planning, offers the direction that matters to planning: going from a flow-through into a corporation is the easier trip, he says, because the assets sitting inside the LLC or partnership wrapper move into the corporate entity. Getting things out of a corporation is harder than putting them in.

That asymmetry is a one-way door, and it should govern the advice more than a rate comparison does: a rate table tells you which structure taxes this year's income least, while Vas Dias's point tells you which structure you can leave, and what leaving costs, if the business changes shape or a buyer appears. The structure that wins on this year's numbers can lose badly in the year the owner wants out.

Vas Dias holds the title of director of tax at a registered investment advisor, not at an accounting firm. Per this publication's records, Compound Planning is a New York City-based RIA with $4.8 billion in regulatory assets across 8,708 accounts and 119 employees as of Sept. 19, which works out to roughly $551,000 per account and about $40 million of assets per employee. An RIA that keeps a tax director on staff and puts him in front of a national audience on entity selection suggests the question has migrated from the accountant's office to the advisor's agenda; for firms serving owner-operators, that migration is operational: the entity review is a meeting to schedule, not a referral to make.

The reason to hold that meeting sooner rather than later is where the new benefits land: the expanded Section 1202 exclusion rewards an owner who sells qualified small business stock, so it pays off when the stock changes hands rather than when the return is filed, which makes the entity decision an exit decision with a filing deadline attached. For a client with any plausible sale horizon, the entity question and the succession question are one conversation, and the owner who has that conversation after a letter of intent arrives is negotiating from the wrong side of the asymmetry.

The same logic should discipline the pitch: succession is a documentation failure before it is a market, and entity structure is one of the documents, but documentation does not always point toward conversion. The two advantages the July law strengthened pull in different directions — 199A toward pass-throughs, the expanded 1202 exclusion toward corporate stock — and for the owner who takes the profit out every year, the case for a corporation is the hardest to make. The coverage does not resolve that case, and an advisor should refer it rather than improvise an answer; my read is that most advisory practices and most owner-operator clients will run this analysis and land close to where they started, which is a legitimate result. The conversion case is narrower than a headline about a wave of new C corporations implies, and Nitti's test is the discipline: the structure that wins matches where the profit is going, which is not the same question as where it is earned.

The framing extends the question to advisors themselves, though the coverage leaves underdeveloped which advisory structures are under review or what a conversion would mean at the firm level; the safe read is that the same directionality applies to a practice: an advisory business that moves into a corporate structure takes a step that is simpler to enter than to exit. Whether the 1202 expansion is reachable for advisory stock is a question a firm takes to its own tax counsel.

That test is easy to apply and easy to postpone, which is why the file matters more than the memo; three facts belong in every owner-client record: the date and type of the current election, the owner's realistic sale horizon, and whether the structure can be unwound without a distribution that triggers tax. None of the three takes a law degree to gather, and waiting has a cost that is easy to miss, because a practice that sorts its calendar by asset size will skip exactly this conversation, and the owner-operator with the most to gain from an entity answer is rarely the largest relationship in the book. So put the review on the calendar before the next return is filed and write the sale horizon beside it; the client record should show that someone asked, even when the answer is to leave the structure alone.