The US president’s latest tax reforms are prompting startups to rethink how they structure their businesses, but what does this mean for entrepreneurs, investors and the accountants who advise them?
For decades, the bulk of US startups have opted for pass-through structures – limited liability companies (LLCs), partnerships and S corporations (see box below). These entities allow earnings to be taxed once, at the individual level, and offer flexibility in how profits are shared or losses absorbed. For many young firms, especially those bootstrapped or founder-led, this remains the most efficient path.
‘We’re seeing significantly more interest from LLCs exploring whether to convert to C corporations’
But there is an alternative, which could prove increasingly popular – the C corporation. By 2020, C corporation tax returns had declined to about 1.5 million, just under 4% of total business filings, down from 17% in the early 1980s.
Over the same period, pass-through entities, including LLCs, S corporations, and partnerships, rose from roughly 83% to more than 96% of business returns. This shift reflects a long-term trend driven by tax reforms, most notably the 1986 Tax Reform Act, which narrowed the gap between corporate and individual tax rates, making pass-through treatment more appealing.
But recent reforms introduced by the Trump administration under the One Big Beautiful Bill Act (OBBBA) may be shifting the landscape, at least for a growing class of high-potential, growth-focused companies.
At the heart of this potential shift lies a revamp of the Qualified Small Business Stock (QSBS) regime. The reforms make it easier, and more rewarding, for founders and investors to receive partial tax exemptions on capital gains, starting after just three years of holding stock in a qualifying C corporation.
These incentives are designed to support businesses aiming to scale, attract outside funding, and potentially exit via acquisition or Initial Public Offering.
‘With the change, we’re seeing significantly more interest from LLCs exploring whether to convert to C corporations,’ says Nick Gruidl, a partner at RSM. ‘They’re doing it specifically to access the QSBS benefit.’
Lifting the cap
The new rules lift the cap on how large a company can grow to qualify for the QSBS preferential tax treatment from $50m to $75m in gross assets at the time of stock issuance. The reforms also introduce partial exemptions of 50% and 75% for capital gains realised after three and four years respectively, instead of requiring a five-year holding period for full exclusion.
‘Even a three-year hold can get you halfway there. That changes the risk equation dramatically,’ Gruidl says.
For accounting firms, this change is not just a tax update, it’s a strategic inflection point. Entity structure is now a frontline advisory issue, with consequences for how firms raise capital, reward staff, and manage long-term liquidity planning.
‘It’s not just about what you do today, but how you structure it over time’
The shift shouldn’t be overstated. Pass-throughs still dominate US business filings, and for many types of companies, from lifestyle businesses to closely held consultancies, they remain optimal. There is no new disincentive for LLCs or S corporations under OBBBA, and the simplicity of pass-through taxation still carries major appeal.
But for startups and scale-ups with eyes on rapid growth or a public exit, the numbers may now point toward C corporations. With higher caps on tax-exempt gains, shorter holding periods and broader eligibility under the QSBS expansion, C corporations have gained new relevance.
This creates an important decision point for emerging companies. Do they stick with an LLC to maximise current tax simplicity or convert to a C corporation to attract venture capital and capture QSBS benefits down the road? Many companies already follow this path: starting as LLCs for simplicity and flexibility, then converting ahead of funding rounds. OBBBA’s changes are likely to reinforce that trajectory.
‘It’s not just about what you do today, but how you document it and structure it over time,’ Gruidl says. He also notes many firms are unclear on eligibility: ‘There’s definitely some grey areas for professional service firms or those with layered ownership. It’s not always obvious whether they qualify or not.’
Where accountants fit in
For ACCA members and other US accounting professionals, this evolution opens up several advisory roles. Accountants are helping founders and boards weigh structural options in light of funding plans and liquidity goals.
They are guiding clients through the tax, legal and operational implications of switching to C corporation status. They are supporting venture capital firms, angel investors and private equity firms in evaluating whether their investments qualify for QSBS, and how to structure them if not.
‘This is an education moment for the profession’
Equally important is documentation. Accountants must ensure companies meet the asset and activity tests required to qualify for QSBS and maintain proper records. ‘A checklist isn’t enough,’ warns Gruidl.
‘We saw what happened with the Employee Retention Credit,’ he adds, referring to a pandemic-era tax credit designed to help businesses keep staff on the payroll. ‘Firms issued boilerplate certifications and it came back to bite them.’
Following recent tax changes, accountants can play a crucial role in ensuring that stock awards to employees are properly structured and documented – both to preserve QSBS eligibility and to head off potential challenges from the tax authorities.
Joseph Wiener, a senior manager at RSM’s Washington National Tax Practice, emphasises the advisory opportunity for accounting professionals. ‘This is a chance to step in and help clients think beyond taxes. It’s about capital strategy, about long-term planning. Accountants are well positioned to lead those conversations,’ says, adding: ‘A lot of clients don’t even know QSBS exists. This is an education moment for the profession.’
New strategic lens
This is about more than just tax. Entity choice has become a tool for unlocking growth, attracting funding and retaining talent. For accountants, that means moving beyond compliance into a more strategic advisory role.
It also means thinking more broadly about whom they serve. Founders need help navigating trade-offs. Investors want confirmation that their shares will qualify. Multinational businesses need to know how to structure US subsidiaries.
With OBBBA, the rules have changed but, more importantly, so have the stakes. Accounting professionals who can guide clients through this structural crossroads will help shape the next wave of high-growth American businesses.
A quick guide to US business entities
LLC (limited liability company)
What it is: A flexible structure combining corporate liability protection with pass-through taxation.
Pros: Simple setup and operations.
Cons: May need to convert to a C corporation to attract VC funding or qualify for QSBS.
Partnership
What it is: A business jointly owned by two or more individuals, typically taxed on personal income.
Pros: Pass-through taxation and few formalities.
Cons: Partners face personal liability unless structured as an LLP.
S corporation
What it is: A special corporate entity that allows profits and losses to pass through to shareholders.
Pros: Avoids double taxation while offering liability protection.
Cons: Restrictions on number and type of shareholders.
C corporation
What it is: A traditional corporation taxed separately from its owners.
Pros: Eligible for QSBS benefits and attractive to institutional investors.
Cons: Subject to double taxation (corporate and shareholder level).
