For years, startup founders heard the same piece of advice for entity choice.
“Start as an LLC for flexibility and taxes. Convert to a C-Corp when investors show up.”
That advice was never wrong — but it was always incomplete. And after the tax changes enacted in mid-2025, following it without understanding the trade-offs can create real, and sometimes irreversible, tax consequences.
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently reshaped several core business tax rules. Most importantly, it locked in long-term certainty for pass-through businesses and expanded incentives for founders who build and exit C-corporations.
The result is not that “LLCs are bad” or that “everyone must be a C-Corp.”
The real takeaway is simpler — your entity choice now determines which tax advantages you can ever access, and when.
The LLC Reality: Predictable Taxes, Ongoing Cash Flow
Limited Liability Companies remain one of the most flexible structures in U.S. business. By default, an LLC is a pass-through entity, meaning profits are taxed directly at the owner level rather than at the company level.
The Big 2025 Change: QBI Is Now Permanent
Under prior law, the Section 199A Qualified Business Income (QBI) deduction — allowing eligible owners to deduct up to 20% of business income — was scheduled to expire at the end of 2025.
The OBBBA made this deduction permanent.
That matters because it removes long-term uncertainty for:
- Consultants
- Agencies
- Professional services firms
- Bootstrapped and lifestyle businesses
- Businesses designed to distribute profits annually
For founders who plan to take money out every year, this permanence is a meaningful win.
The Trade-Offs Still Exist
LLCs are not “tax-free machines.” Key realities remain:
- Business income is generally subject to self-employment taxes
- There is no special exit exclusion comparable to QSBS
- High earners may phase out of QBI benefits depending on income type and structure
In short, LLCs reward steady income, not explosive exits.
The C-Corporation Reality: Built for Scale and Exit
C-Corporations remain the default structure for venture-backed startups — but tax law is now a bigger part of that reason.
The driver is Section 1202 Qualified Small Business Stock (QSBS).
QSBS allows founders and early investors to exclude capital gains from federal tax when they sell qualifying C-Corp stock — subject to rules around time, size, and issuance.
What Changed Under the OBBBA
For QSBS stock issued after July 4, 2025, the benefits expanded in three important ways.
1. A Tiered Holding Period (No Longer “All or Nothing”)
Previously, founders had to hold stock for five full years to qualify for any exclusion.
Now the law provides a phased system:
- 3+ years: 50% of gains excluded
- 4+ years: 75% of gains excluded
- 5+ years: 100% of gains excluded
This doesn’t eliminate the incentive to build long-term — but it does reduce the penalty for earlier exits or secondary liquidity.
2. A Higher Exclusion Cap
The lifetime gain exclusion per issuer increased from:
- $10 million → $15 million, or
- 10× the shareholder’s basis, whichever is greater
Starting in 2027, the $15 million cap will be indexed for inflation.
3. A Larger “Small Business” Definition
To qualify for QSBS, a company’s gross assets must be below a statutory threshold at the time stock is issued.
That threshold increased from $50 million to $75 million, allowing later-stage startups to continue issuing QSBS-eligible shares.
The Conversion Question: Why Timing Matters
Many founders ask:
“Why not start as an LLC and convert later?”
You can. But there are structural consequences to understand.
QSBS Only Applies to C-Corp Stock
QSBS benefits apply only to originally issued C-Corporation stock.
This means:
- The QSBS holding period generally starts when the C-Corp stock is issued
- Time spent operating as an LLC does not count toward that clock
- Appreciation that occurs before conversion may not receive QSBS treatment
That doesn’t make conversion “wrong” — but it does make it a timing decision with tax consequences, not a neutral administrative step.
In some cases, founders intentionally delay conversion. In others, converting early maximizes long-term exclusion potential. The right answer depends on growth expectations, funding plans, and exit horizon.
There Is No Universal “Best” Structure
Despite online debates, the law does not declare a single winner.
An LLC often makes sense if:
- You expect consistent annual profits
- You plan to distribute cash regularly
- You are not targeting institutional venture capital
- Your exit expectations are modest or uncertain
A C-Corp often makes sense if:
- You plan to raise venture capital
- You expect rapid growth and reinvestment
- Your goal is acquisition or IPO
- You want access to QSBS exclusion on exit
The mistake isn’t choosing one or the other —
the mistake is choosing without understanding what you give up.
The Bottom Line for 2026 Founders
The OBBBA didn’t eliminate the LLC vs. C-Corp debate.
It clarified it.
- LLCs now offer stable, predictable tax treatment for income-focused businesses.
- C-Corps offer powerful, but conditional, exit-focused tax advantages.
- Entity choice is no longer just about “today’s taxes,” but about which future benefits remain available at all.
Founders don’t need fear-based advice.
They need informed timing, realistic expectations, and alignment between structure and strategy.