Starting a business has never been easier. With tools like LegalZoom, setting up an entity can feel like a breeze. But ease has a downside: the LLC has become the default structure for many entrepreneurs. Decades ago, C Corporations (C Corps) reigned supreme. Today, LLCs dominate. It’s time to reconsider why.
Culturally, LLCs (and S Corps) are seen as tax-efficient—after all, they’re taxed only once at the owner’s level. In contrast, C Corps face double taxation: once at the corporate level and again when profits are distributed to owners. This (purported) logic held up for years, but Trump’s tax cuts in 2017 shifted the game.
Before the Tax Cuts and Jobs Act (TCJA), the corporate tax rate was too high for many small businesses to justify a C Corp. But with the lowered rates, we need to revisit the math. Could business owners be leaving serious money on the table? Let's take a look.
How Sarah’s Entity Choice Created a $6.5M Difference
Sarah had built something real.
After a decade of hard work, smart decisions, and a few sleepless nights, her business, Skynet LLC, was thriving—$3 million in annual profits and growing. She wasn’t just running a business anymore; she was building an asset.
And like any savvy entrepreneur, she knew the endgame: one day, she’d sell.
But how she structured her business today would define how much of that exit money she actually kept.
For years, Sarah had operated as an LLC (taxed as an S Corporation), enjoying pass-through tax benefits and avoiding the dreaded “double taxation” of a C Corporation. But recently, she’d heard about QSBS (Qualified Small Business Stock)—a tax incentive that could allow her to sell the business tax-free on the first $10 million.
She wanted to know: Would switching to a C Corp actually make her more money at exit—or would it backfire?
She needed to see the numbers.
Scenario A: Sticking with an LLC (Taxed as an S Corporation)
Sarah sits down with her team and lays it all out.
Under her current S Corp tax structure, all profits pass through to her personal tax return. That means every year, she has to pay taxes on her company’s full earnings, whether she takes the money out or reinvests it.
Sarah decides to pay herself a reasonable salary of $350,000, leaving the remaining $2.65 million in company profits to flow through as personal income.
Annual Profits: $3,000,000
Sarah's Salary: $350,000
Remaining Pass-Through Profits: $3,000,000 - $350,000 = $2,650,000
Her tax attorney reminds her that thanks to the 20% QBI deduction, she won’t be taxed on the full amount. The QBI deduction reduces her taxable income by $530,000, bringing it down to $2.12 million before taxes.
QBI Deduction: 20% of $2,650,000 = $530,000
Taxable Income after QBI Deduction: $2,650,000 - $530,000 = $2,120,000
Then comes the hard part: taxes.
Sarah is in the highest tax bracket, facing a 37% tax rate on her pass-through income. That means she’ll owe $784,000 in taxes on her pass through profits.
Taxes Owed = 37% x $2,120,000 = $784,000
When the dust settles, what Sarah actually keeps is (1) her $350,000 salary (fyi: we are ignoring taxes on her salary for simplicity) and (2) any after-tax profits now available to be reinvested.
After-Tax Profits: $2,650,000 - $784,000 = $1,866,000
Now, let’s assume Sarah plays the long game and reinvests that money at a 10% annual return on investment for the next 7 years.
Reinvestment Rate: 10%
By the time she’s ready to sell, her compounded reinvestments have grown to $19.47 million. Here is the formula we are using for reference.
Where:
FV = Future Value of the investment
P = Annual reinvestment (constant amount reinvested each year)
r = Annual return rate
n = Number of years
Then comes the big moment: Sarah sells her business for $20 million.
She’s feeling good—until her team reminds her about capital gains taxes.
Because S Corps don’t qualify for QSBS, she’ll owe the full 23.8% tax rate on the entire $20 million sale price—a $4.76 million tax bill.
Taxed Owed on Exit = $20,000,000 x 23.8% = $4,760,000
After taxes, Sarah walks away with:
Net Exit Proceeds = $20,000,000 - $4,670,000 = $15,240,000
Total Wealth (Reinvestments + Sale Proceeds) = $32,940,000
Not bad. But could she do better?
Scenario B: Switching to a C Corporation (With QSBS & Reinvestment)
Sarah isn’t convinced yet. So she models out the C Corp path to see what happens.
Under this structure, her business would now be taxed at the 21% corporate rate before she sees any of the profits.
At first, this seems like a drawback—until her tax attorney points out a key advantage:
Sarah won’t have to pay personal income taxes on money she reinvests in the company.
Here’s how her numbers look each year:
Sarah still takes her $350,000 salary, but now, the remaining $2.65 million gets taxed at the 21% corporate tax rate, leaving $2.094 million in after-tax profits.
After Taxed Profits: $2,650,000 x 21% = $2,094,000
Instead of distributing dividends, Sarah retains the full $2.094 million in the business each year, justifying it as reinvestment into growth and operations.
Over the next 7 years, she lets those reinvested profits compound at 10% annual growth, accumulating $21.85 million before her exit.
Then comes the big sale.
This time, QSBS changes everything.
Under the QSBS rules, Sarah gets to sell the first $10 million completely tax-free.
On the remaining $10 million, she still owes the 23.8% capital gains tax—which means she’ll pay $2.38 million in taxes.
Taxes Owed on Exit = $10,000,000 x 23.8% = $2,380,000
When the dust settles, here’s what Sarah keeps:
Net Exit Proceeds = $20,000,000 - $2,380,000 = $17,620,000 Total Wealth (Reinvestment + Sale Proceeds) = $39,470,000
And The Winner Is…
At first, the S Corp seemed like the clear winner—lower taxes, pass-through income, and no corporate tax to worry about.
But when QSBS and reinvestment strategies are used correctly, the C Corp actually outperformed by around $6.53 million.
✅ Saved millions in taxes at exit
✅ Reinvested pre-tax earnings, compounding wealth faster
✅ Avoided forced distributions, allowing for tax-efficient growth
A Few Important Considerations
Now, in reality, the numbers might not play out this cleanly. There are nuances in tax strategy, reinvestment decisions, and how retained earnings impact business valuation.
For one, if you reinvested around $20 million in your business, I doubt you would only sell the business for $20 million. In addition, adding reinvestment plus the exit proceeds to calculate total wealth is likely too simplistic of a way to think about it.
I highly encourage you and all of my finance friends to review my numbers for accuracy.
But that’s exactly the point—planning your entity structure isn’t just paperwork, it’s a wealth-building decision.
This is back-of-the-napkin math meant to illustrate why it’s worth sitting down with the right team to ensure your structure maximizes value.
Thinking about your own entity structure?
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