Small business owner clients weighed the pros and cons and organized their businesses as corporations, partnerships or some other entity when they started. But laws enacted over the last decade should have advisors talking to those clients about the right fits today.
The tax law enacted in July 2025 changed the equation for business entity selection. The temporary Section 199A deduction of 20% off qualified business income for passthrough business owners that was part of the 2017 tax law was made permanent. The cut to the corporate tax rate in the 2017 law also made a difference.
"We are certainly seeing things in our industry, the tax industry, that we haven't seen since before 1986, which are a lot of businesses willingly moving over to become a C corporation," said Tony Nitti, a Denver-based partner who leads the S corporation team in the National Tax Department at EY US. "Anybody that's in any way involved with advising clients on choice of entity has to kind of wash away that old mindset of 'passthrough businesses are always going to be what's best for you' and accept the fact that for certain types of businesses right now, C corporations are going to be pretty darn attractive."
At the same time, the July 2025 law included a benefit to becoming a corporation, the expanded exclusion that allows individuals to avoid taxes on qualified small business stock under Section 1202.
"It's not that there was this earth-shattering new legislation in the reconciliation bill that would suddenly make a bunch of taxpayers say, 'I want to be a C corp,' or 'I want to be a partnership or S Corp,' because to be fair, there were kind of positives on all sides coming out of the reconciliation," Nitti said. "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."
What's involved in changing a business entity type?
Once a business is established, changing entity type could be an administrative burden. Changing from a C corporation to a passthrough requires distributing the assets first, and there are tax implications for that, whereas changing from one type of passthrough to another is more flexible.
"Typically going from a flowthrough to a C corporation is a little bit easier because you're essentially just taking your assets that are held inside of that LLC or partnership flowthrough wrapper and putting them into the corporate entity," said Ryan Vas Dias, the Kirkland, Washington-based director of tax at Compound Planning, a New York City-based registered investment advisor. "It's harder to get things out of a corporation than it is to put them in."
Also, it is difficult to get appreciated assets out of an S corporation, he said.
Business entity type for RIAs
For financial advisors selecting an entity type for their registered investment advisory businesses, the choice might be difficult. They might not benefit from either the 20% deduction under Section 199A for passthrough entities and might not have qualified small business stock to use the benefit for C corporations.
"Some of the bigger incentives that are dangled out there for both C corps and passthrough owners probably do not apply to your financial advisor businesses," Nitti said.
Entity type also indicates different compensation structures, Vas Dias said.
If an RIA's attitude is "'this is going to be our job for the next however many years, and we may bring new partners in, but it's going to be sort of housed within its own entity,' I would say that's more going to lend towards an S corporation or an LLC," he said. "I see, for advisors, the LLC is often a more favorable entity structure," though it depends on specific circumstances.
Relative certainty
It is helpful that there is more certainty to work with now than there has been for many years.
"I think for the first time since 2017, we're not waiting for something," Nitti said. "There's not some bill that's being bandied about that's going to change this analysis dramatically. Obviously, anything can happen at any time because we do still have complete Republican control, so a second bite of the reconciliation apple is possible."
That said, "We can move forward with our choice of entity analysis with pretty darn solid inputs," he added.
