Choice of Entity and Tax Planning Post-OBBBA: C Corp vs. Partnerships, Exit Planning, Entity Conversion

This CLE/CPE course will provide practical guidance to tax counsel and advisers on the challenges of choosing a legal entity for startups, how business type and potential exit plans can influence entity choice, and planning for existing businesses where a change in tax classification can meaningfully change owners’ financial outcomes. The panel will discuss key provisions of the One Big Beautiful Bill Act (OBBBA) to be considered in entity selection, the influence of business type and stage on entity selection, qualified small business stock or “QSBS” planning and opportunities, and avoiding the tax pitfalls reorganizations and dispositions. The panel will also discuss capital vs. profits interests in rewarding key people, changes in some allowable deductions and exclusions under OBBBA, exit strategy planning, and other critical considerations for effective tax planning.

OBBBA made sweeping changes to the tax code, impacting decisions on entity selection at formation or potential conversion to another entity form. Choosing an entity's legal structure is complicated, with new tax laws that include the permanent 21% corporate tax rate, scaling up the QSBS exclusion, permanently extending the 20% QBI deduction, 100% first-year bonus depreciation for qualified assets, and a variety of limitations for counsel to consider.

Choice of entity considerations for startups must involve a planning approach to structuring the company that will enable it to achieve its financial and operational goals. For those that intend to issue stock/options, raise capital, spin off separate business lines, or deal with the particular issues of cashing out or business succession, the choice of entity at the beginning can have a significant tax and operational impact on the business. For pass-through entities that have to navigate the 20% tax deduction and its many exceptions, a company's current or intended activities must be evaluated. For others, a conversion to a C corporation should be an available option as well.

State law is also an important consideration when choosing a legal entity. Some states have different tax rates for various entities and are taking differing approaches on how closely they conform to the federal tax law for state income tax purposes. The complexities involved in entity selection or conversion require counsel to guide business owners to set up the right type of entity to meet initial goals with the flexibility to change the entity form as the business evolves. Failure to do so can create avoidable tax difficulties for business owners in the operation, liquidation, or succession of the company.

Listen as our experienced panel provides a detailed examination of the tax planning considerations and opportunities in advising clients on choosing a business entity.