Entity Choice & Structuring

Key differences

• Partnership / limited liability company (LLC): flexible allocations, basis from entity debt, tax-free property distributions.
• S corporation: salary + distributions (payroll tax savings); per-share allocations; ≤ 100 eligible shareholders.
• C corporation: 21% flat, double tax on dividends, best fringe benefits and capital raising, qualified small business stock exclusion.

Tax on $100 of profit (37% owner)

Pass-through with qualified business income (QBI) deduction: ≈ $29.60 · C corporation distributed: ≈ $39.80 · C corporation retained: $21.

Section 1202 (stock issued after July 4, 2025)

50% (3 years) · 75% (4 years) · 100% (5 years); $15 million cap per issuer.

Conversions

• Pass-through → corporation: generally tax-free (Section 351).
• C corporation → partnership: taxable liquidation.
• C → S: built-in gains tax for 5 years.
• Check-the-box: single-member LLC disregarded; multi-member → partnership by default.

Exit

Pass-through asset sale → buyer step-up, one tax. C corporation → sell stock to avoid double tax.

Exam traps

• The Section 1202 exclusion applies only to C corporation stock acquired at original issue — not S corporation stock or shares bought from another shareholder.
• A single-member LLC is ignored for income tax but treated as a separate entity for its employees' payroll taxes.
• An LLC can elect S corporation treatment — but must then meet every S rule, including one class of stock.