Summary. Entity choice is two decisions that people collapse into one: what the business is under state law, and how it is taxed under federal law. Since the check-the-box regulations those questions come apart almost entirely, so an LLC may be taxed as a partnership, an S corporation, or a C corporation without changing anything about its governance. This article separates the two decisions and works through the tax consequences that actually drive the answer — self-employment tax and reasonable compensation, basis and loss utilization, § 199A, qualified small business stock, and what happens on exit, where most of the money is. It closes with how to move between regimes when the original choice stops fitting, and with the state taxes that increasingly override the federal analysis.

Ask a founder what kind of company they have and the answer is usually "an LLC" or "an S corp," as though those were the same kind of thing. They are not. "LLC" is a state-law entity type. "S corporation" is a federal tax classification. An LLC can be an S corporation. A corporation can be an S corporation. An LLC can also be a partnership, a disregarded entity, or a C corporation, without amending its operating agreement or telling the Secretary of State anything.

Untangling those two axes is the beginning of any useful analysis, because the state-law question is easy and the tax question is not.

Axis one: the state-law entity

Sole proprietorship / general partnership. No filing, no liability shield. General partners are jointly and severally liable for partnership obligations. Occasionally appropriate for a truly trivial venture; almost never appropriate once there are employees, contracts, or a lease.

Limited liability company. The default answer for most closely held businesses in most states. Members are not personally liable for entity obligations. Governance is contractual — the operating agreement can do almost anything — and the statutory defaults are minimal. Formation and maintenance costs are low.

Corporation. A statutory governance structure: stockholders elect directors, directors appoint officers, officers run the business. More formality, more mandatory rules, and a body of case law thick enough that outcomes are predictable. That predictability is why institutional investors insist on it.

Limited partnership. General partner with unlimited liability (usually itself an LLC), limited partners with a shield conditioned on not participating in control. The standard vehicle for investment funds and for real estate.

Which one, ignoring taxes:

  • Raising venture capital? Delaware C corporation. Not because it is tax-optimal — it usually is not — but because funds cannot hold pass-through interests without generating unrelated business taxable income for their tax-exempt limited partners and effectively connected income for foreign ones, because option plans work cleanly only with corporate stock, and because every term sheet, financing document, and diligence checklist assumes it. Fighting this costs more than it saves.
  • Two to five owners, operating business, no institutional capital? LLC.
  • Real estate? LLC or LP, almost always, for reasons developed below.
  • Licensed professionals? Whatever the state's professional entity statute permits — PC, PLLC, LLP — which may be a short list.
  • Nonprofit? Nonprofit corporation, a different analysis entirely.

Axis two: the federal tax classification

The check-the-box regulations sever tax classification from state-law form for most entities.

Defaults.

  • Single-member LLC: disregarded — treated as a sole proprietorship or, if owned by a corporation, a branch.
  • Multi-member LLC: partnership.
  • Corporation (state-law): C corporation — a "per se" corporation that cannot elect out of corporate classification, though it may elect S status.

Elections.

  • Form 8832 elects corporate classification for an eligible entity.
  • Form 2553 elects S corporation status, and an eligible LLC may file it directly to be treated as an S corporation, without first filing Form 8832.
  • Timing: generally by the 15th day of the third month of the tax year for which the election is to take effect. Late-election relief is available under Rev. Proc. 2013-30 in most ordinary cases, and it is used constantly, but do not plan around it.
  • The five-year rule: an entity that changes classification by election generally cannot change again for sixty months.

The four regimes in one paragraph each.

Disregarded. Income reported on the owner's return; no separate federal income tax return; the entity still exists for liability, employment tax, and most state purposes. Simplest possible structure for a single owner who is not worried about self-employment tax.

Partnership. No entity-level tax. Income, deductions, credits, and character flow through on Schedule K-1. Extremely flexible: allocations need not follow ownership percentages so long as they have substantial economic effect, distributions can be non-pro-rata, and property can go in and come out without triggering gain in most cases. Complexity is real — capital accounts, § 704(b) and (c), § 754 elections, hot assets under § 751, and the centralized partnership audit regime.

S corporation. No entity-level tax, with exceptions. Income flows through strictly pro rata by share ownership — no special allocations, ever. Only one class of stock is permitted (differences in voting rights are fine). Eligibility is restricted: no more than 100 shareholders, only individuals, estates, and certain trusts, no nonresident alien shareholders, and no corporate or partnership shareholders. The payoff is self-employment tax savings, discussed below.

C corporation. Entity-level tax at 21%, then shareholder-level tax on dividends at qualified rates plus the 3.8% net investment income tax for most owners who receive them. "Double taxation" — real, but frequently overstated in businesses that pay out most earnings as compensation, and irrelevant to a business that reinvests everything and exits through a stock sale qualifying under § 1202.

Self-employment tax: the thing that drives most small-business choices

This is the single most common reason a profitable small business elects S status.

Sole proprietor or partner in an operating partnership. Net earnings from self-employment are subject to self-employment tax at 15.3% on the first tranche of earnings (12.4% Social Security up to the wage base, 2.9% Medicare with no cap), plus the 0.9% Additional Medicare Tax above threshold amounts. One-half of the SE tax is deductible.

S corporation shareholder-employee. The shareholder takes a salary, subject to FICA. The remaining profit passes through as a distributive share not subject to employment tax at all.

The arithmetic. A consultant with $250,000 of net profit. As a sole proprietor, essentially all of it is subject to SE tax — roughly $20,000 or more depending on the year's wage base. As an S corporation paying a $120,000 salary, FICA applies to $120,000 and the remaining $130,000 passes through free of employment tax. The gross saving is several thousand dollars annually, net of payroll administration and a more expensive tax return.

The constraint: reasonable compensation. The IRS may recharacterize distributions as wages where the shareholder-employee's salary is unreasonably low relative to services performed. David E. Watson, P.C. v. United States, 668 F.3d 1008 (8th Cir. 2012), upheld recharacterization where an accountant took $24,000 of salary and roughly $175,000 in distributions; the court accepted the government's expert-derived reasonable salary and the taxpayer owed employment taxes and penalties. Fleischer v. Commissioner, T.C. Memo. 2016-238, reached a related result on assignment-of-income grounds where the individual, not the corporation, was the contracting party with the broker-dealer.

How to defend a number. Document it: comparable compensation surveys for the role, industry, and geography; an allocation of the owner's time among executive, production, and administrative functions; the company's reliance on non-owner employees and on capital rather than on the owner's personal services; and a board or member resolution setting the salary annually with the analysis attached. A defensible number set in advance is worth far more than a good argument made in audit.

The partnership counterpart. Partners generally cannot be W-2 employees of their own partnership — Rev. Rul. 69-184 — and guaranteed payments are subject to SE tax. The limited partner exception in IRC § 1402(a)(13) excludes a limited partner's distributive share, but Renkemeyer, Campbell & Weaver, LLP v. Commissioner, 136 T.C. 137 (2011), held the exception unavailable to law firm partners actively performing services, reading the exception as directed at passive investors. The Tax Court has continued to apply a functional analysis to state-law limited partners in service businesses, and the issue remains a genuine audit exposure for fund managers and professional LLPs.

A structure that gets used: an operating partnership with an S corporation as the service-providing partner, so that the owner's compensation flows through an entity where the reasonable-compensation regime applies. It works, and it adds a return, a payroll, and a set of facts that must be respected.

Basis, losses, and why real estate is a partnership

Losses flow through, but an owner can deduct them only to the extent of basis, then only to the extent at risk under IRC § 465, then only to the extent permitted by the passive activity rules of IRC § 469, and then subject to the excess business loss limitation. Four gates, in order.

The basis difference is the whole game for leveraged businesses.

  • Partnership. A partner's basis includes their share of partnership liabilities under IRC § 752. Nonrecourse debt is allocated under regulations; recourse debt follows economic risk of loss. A real estate partner who contributes $100,000 of cash to a partnership that borrows $900,000 nonrecourse on the property has basis reflecting a share of that debt, and can deduct depreciation-driven losses against it.
  • S corporation. A shareholder's basis includes stock basis and direct loans from the shareholder to the corporation — but not the shareholder's share of corporate debt, even debt they personally guaranteed. A guarantee alone creates no basis. The same real estate investor in an S corporation is limited to $100,000 of losses.

That single difference is why leveraged real estate is held in LLCs taxed as partnerships and essentially never in S corporations.

Distributions of appreciated property.

  • Partnership: generally no gain on a distribution of appreciated property to a partner (subject to §§ 704(c)(1)(B), 707, 731(c), and the mixing-bowl rules). Property can come out.
  • S or C corporation: a distribution of appreciated property is treated as a sale at fair market value under IRC § 311(b), triggering gain at the corporate level. Property cannot come out without tax.

The one-way door. Contributing appreciated property to a corporation is generally tax-free under IRC § 351 if the control test is met; contributing to a partnership is tax-free under IRC § 721 with no control requirement. Getting property out of a corporation is taxable both ways. Put appreciating assets — real estate, intellectual property that will be licensed — where they can be extracted, which usually means not inside a corporation.

Passive activity. Rental activity is per se passive with narrow exceptions (the $25,000 active-participation allowance, subject to phase-out, and the real estate professional rules of § 469(c)(7)). Passive losses suspend until there is passive income or a fully taxable disposition of the activity. Material participation for a business owner is usually satisfied, but the seven tests are specific and time logs matter in audit.

Section 199A: the deduction that made pass-throughs competitive

IRC § 199A permits a deduction of up to 20% of qualified business income from a domestic pass-through, effectively reducing the top rate on that income by roughly seven percentage points. Three features determine whether a given business gets it:

  • Taxable income thresholds. Below the threshold, the deduction is generally available without limitation. Above the phase-in range, two limits bite.
  • The W-2 wage and capital limit. The deduction cannot exceed the greater of 50% of the business's W-2 wages, or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property. This rewards businesses with employees or with depreciable assets, and punishes a one-person service business paying no wages — which, incidentally, is a counterweight to the S corporation instinct to minimize salary, since W-2 wages help here.
  • Specified service trade or business (SSTB) exclusion. Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, and any business whose principal asset is the reputation or skill of its employees or owners. Above the threshold, SSTB owners lose the deduction entirely. Engineering and architecture are expressly carved out of the SSTB list.

Planning consequences: aggregation elections across commonly controlled businesses, the separation of non-SSTB functions into distinct entities (with real substance and arm's-length pricing, not a paper split), and attention to the interaction between the S corporation salary decision and the wage limitation.

Watch the sunset. Section 199A's expiration date has been the single largest variable in pass-through-versus-C-corporation modeling since 2018. Any comparison that assumes the deduction continues indefinitely — or that assumes it disappears — should be run both ways.

Section 1202: the reason a C corporation can win

IRC § 1202 excludes gain on the sale of qualified small business stock from federal income tax. For stock acquired after September 27, 2010, the exclusion is 100%, and the excluded gain is not an AMT preference item.

Requirements, each of which is a genuine trap:

  • C corporation stock, acquired at original issuance from the corporation, in exchange for money, property, or services.
  • Domestic C corporation at all times during substantially all of the holder's holding period.
  • Gross assets of $50 million or less at all times before and immediately after issuance. Test this at every financing — a company that crosses the threshold can no longer issue QSBS, though previously issued stock stays qualified.
  • Active business requirement: at least 80% of assets used in the active conduct of a qualified trade or business. Excluded businesses include most professional services, banking and financing, farming, hotels and restaurants, and mineral extraction.
  • Five-year holding period.
  • Cap: the greater of $10 million of excluded gain per taxpayer per issuer, or 10 times the aggregate adjusted basis of the stock disposed of in that year. The 10× prong is the one that matters for founders and investors who contributed real capital.
  • Redemption traps: significant redemptions from the issuer around the time of issuance can disqualify the stock.

Stacking and packing. Gifts to non-grantor trusts and to family members can multiply the $10 million cap across taxpayers; contributing appreciated property before a rollup increases basis for the 10× prong. Both are legitimate and both require care.

What § 1202 does to the analysis. For a business that will reinvest earnings and exit by selling stock in five or more years, a C corporation may deliver a lower total tax than any pass-through, because the entity-level 21% is paid on retained earnings that would have been taxed at higher individual rates anyway, and the exit is tax-free. For a business that will distribute cash to owners annually, the C corporation is usually worse. The variable is not the entity. It is whether the money comes out along the way.

The rest of the C corporation picture

Double taxation, honestly assessed. In a closely held C corporation where owners work in the business, most earnings leave as deductible compensation, and the residual subject to double tax is small. The problem appears at scale, on a sale of assets, and on accumulated cash.

Accumulated earnings tax. IRC § 531 imposes a penalty tax on earnings accumulated beyond the reasonable needs of the business to avoid shareholder-level tax. Defend it with documented plans: expansion, acquisitions, working capital under the Bardahl formula, debt retirement, contingencies.

Personal holding company tax. IRC § 541 imposes tax on undistributed personal holding company income where a closely held corporation's income is largely passive. This catches corporations that sold their operating business and now hold investments.

Asset sale versus stock sale. In a C corporation asset sale, gain is taxed at the corporate level and again on distribution — frequently a combined rate above 40% — which is why C corporation owners insist on stock sales and buyers insist on asset purchases. In a pass-through, an asset sale is taxed once, and the buyer gets a stepped-up basis; the parties can agree on a § 338(h)(10) or § 336(e) election for an S corporation to get the same result from a stock purchase. This single dynamic decides more entity-choice questions than everything else combined, because it determines the after-tax proceeds from the transaction that matters most.

S corporation traps worth knowing before electing

  • One class of stock. Disproportionate distributions, some shareholder debt that is not within the straight-debt safe harbor, and certain non-conforming provisions in a shareholders' agreement can create a second class and terminate the election. LLCs electing S status must conform the operating agreement: strip out special allocations, targeted allocations, capital-account-based liquidating distributions, and preferred returns. This is the most frequently missed step in the LLC-taxed-as-S-corporation structure, and a boilerplate operating agreement is almost always non-conforming.
  • Ineligible shareholders. A transfer to a nonresident alien, a partnership, an ineligible trust, or (in most cases) an IRA terminates the election immediately. Transfer restrictions in the shareholders' agreement are the protection.
  • Built-in gains tax. IRC § 1374 imposes a corporate-level tax on gains recognized within five years after a C-to-S conversion, to the extent of the built-in gain at conversion. Get an appraisal at conversion to establish the ceiling.
  • Passive investment income. An S corporation with C corporation earnings and profits that has excessive passive investment income for three consecutive years loses its election, and pays a tax under § 1375 in the meantime.
  • Inadvertent termination relief exists under § 1362(f) and is granted routinely, but the process involves a private letter ruling, a fee, and months. The IRS has also expanded self-correction procedures for common defects. Neither is free.
  • Basis reporting. Shareholders must file Form 7203 to substantiate stock and debt basis when claiming losses or receiving distributions. Basis schedules that were never maintained are a recurring problem on audit and on sale.

State taxes now drive as much of this as federal

Modeling only the federal result produces wrong answers in a growing number of states.

  • Franchise and entity-level taxes. California's $800 minimum franchise tax plus an LLC gross-receipts fee; Texas's franchise (margin) tax; Tennessee's excise and franchise taxes on LLCs; New York City's unincorporated business tax and its general corporation tax, which do not recognize S status. New York City in particular can make an S corporation election federally sensible and locally expensive.
  • Pass-through entity tax (PTET) elections. After the federal deduction for state and local taxes was capped, most states with an income tax enacted an elective entity-level tax that the entity deducts federally, with a credit to the owners. The election is usually annual, sometimes irrevocable, and the mechanics differ meaningfully — including whether nonresident owners benefit and whether the credit is refundable. A PTET election is frequently worth more than the entire self-employment tax analysis, and it is available only to pass-throughs, which is a point in their favor.
  • Composite returns and nonresident withholding for owners in multiple states.
  • Nexus. Where the entity has employees, property, or economic presence, it will have filing obligations, and the owners may as well. See the discussion of post-Wayfair nexus in the sales tax context, which applies with variations to income tax.
  • Conformity. Not every state follows the federal treatment of S corporations, § 199A, or bonus depreciation.

Changing your mind

Original choices stop fitting. Moving between regimes ranges from trivial to expensive.

Easy, generally tax-free:

  • Partnership or disregarded LLC → S or C corporation. Elect on Form 2553 or 8832, or convert under state law. Treated as a § 351 contribution. Watch for liabilities in excess of basis under § 357(c), which triggers gain.
  • S corporation → C corporation. Revoke the election. Note the five-year re-election waiting period and the treatment of accumulated adjustments account distributions during the post-termination transition period.
  • The F reorganization. The workhorse of middle-market M&A involving S corporations: form a new holding company, contribute the operating S corporation to it as a qualified subchapter S subsidiary, then convert the subsidiary to an LLC. The result is a disregarded entity beneath an S corporation holding company, which lets a buyer purchase LLC units and receive asset-purchase tax treatment while the seller keeps a single level of tax. It also cleans up S election history risk. Done correctly it is tax-free under IRC § 368(a)(1)(F); done carelessly it is not.
  • State-law conversion between LLC and corporation is available in most states by filing a certificate of conversion — one document, no asset transfers, no new EIN in some cases.

Hard and usually taxable:

  • C corporation → partnership or LLC taxed as a partnership. This is a deemed liquidation: gain at the corporate level under IRC § 336 on all appreciated assets, and gain at the shareholder level under § 331. For an appreciated business this is prohibitive. It is the reason the C corporation decision deserves care at formation: you can get in cheaply and you cannot get out.
  • C corporation → S corporation is an election rather than a liquidation, but carries the built-in gains tax and the passive income rules described above.

A decision framework

Work through these in order.

  1. Will institutional equity investors be involved? If yes, Delaware C corporation. Stop.
  2. Is the business a leveraged real estate or asset-holding venture? LLC taxed as a partnership. Basis from entity debt and tax-free property distributions decide it.
  3. Will owners have different economic deals — preferred returns, waterfalls, special allocations, sweat equity vesting on a non-pro-rata basis? Partnership. The S corporation's single-class-of-stock rule cannot accommodate it.
  4. Is there a nonresident alien, entity, or ineligible trust owner, now or plausibly? Not an S corporation.
  5. Will the business retain and reinvest earnings for five or more years, in a non-excluded industry, with a stock-sale exit? Model the C corporation with § 1202 seriously. It frequently wins.
  6. Is it a profitable owner-operated services business distributing most of its cash? LLC or corporation with an S election, with a defensible salary and attention to § 199A wage limits.
  7. In every case, run the state analysis — entity-level taxes, PTET availability, and nexus — before finalizing.
  8. Then check the exit against the most likely buyer's preferred structure, because the after-tax number on that day usually dwarfs the annual savings.

The practical closing point

Entity choice is reversible in one direction and nearly irreversible in the other, and it is made at the moment the founders know least about the business. That asymmetry argues for a default: start as an LLC unless there is a specific reason not to, because an LLC can elect into any tax regime later, including corporate status by election or a tax-free state-law conversion, while a C corporation with appreciated assets can never get back out.

The specific reasons not to are real and common — venture financing, a § 1202 strategy, an industry where every buyer expects a corporation — and when one applies, apply it. But the founder who forms a Delaware C corporation because that is what startups do, and who then operates a profitable consulting business out of it for a decade paying tax twice on money that comes out every year, has made an expensive decision that nobody ever revisited. Revisit it. The review costs a few hours and the F reorganization or S election that follows costs less than a single year of the mistake.

Four businesses, four answers

Abstract frameworks are less useful than worked cases. Here are four that recur.

The consulting firm. One owner, $400,000 of net profit, no employees beyond an assistant, all cash distributed annually. Federal analysis: an S election saves employment tax on the profit above a defensible salary, but the § 199A deduction is unavailable above the threshold because consulting is a specified service business, so the wage limitation is irrelevant. The answer is an LLC with an S election, a salary set by a documented compensation study, and a PTET election if the state offers one. A C corporation is wrong because everything comes out every year; the § 1202 exclusion is unavailable anyway for a service business of this kind.

The software company. Three founders, planning to raise a seed round within eighteen months, no distributions ever, expected exit through an acquisition in six to eight years. The answer is a Delaware C corporation formed now, not later, because § 1202's five-year clock starts at issuance and because converting after a priced round is possible but wasteful. Founders should make § 83(b) elections on restricted stock within thirty days of issuance, which is also the moment the QSBS holding period begins. The tax cost of the C corporation regime during the loss years is zero; the benefit at exit can be eight figures per founder.

The apartment portfolio. Two investors, $12 million of buildings, $9 million of nonrecourse debt, cost-segregation-driven depreciation producing paper losses. The answer is an LLC taxed as a partnership, one per property or per lender requirement, under a holding LLC. Debt-inclusive outside basis under § 752 makes the losses usable; a § 754 election lets a buyer of an interest step up inside basis; and property can be distributed or exchanged under § 1031 without a corporate-level toll charge. An S corporation would strand the losses and lock in the buildings, and neither problem has a fix after the fact.

The manufacturer at exit. Family C corporation, forty years old, $30 million enterprise value, mostly built-in gain in equipment and goodwill. The buyer wants assets. A straight asset sale produces corporate tax at 21% plus shareholder tax on the liquidating distribution — the classic double hit. Options: negotiate a stock sale at a reduced price reflecting the buyer's lost step-up; allocate a defensible portion of consideration to personal goodwill owned by the founder individually, where the facts support it (no non-compete previously assigned to the company, customer relationships genuinely personal); or, if the horizon allows, convert to an S corporation and wait out the five-year built-in gains period. The last option requires a conversion-date appraisal and patience the transaction rarely permits, which is exactly why entity choice at formation deserves the attention it never gets.

What to document, whatever you choose

Entity choice is not a one-time memo. Keep a short file that any future advisor can pick up:

  • The formation documents and every election, with proof of filing and IRS acceptance. Missing Form 2553 acceptance letters are a routine diligence problem in M&A and can hold up a closing for weeks.
  • Annual reasonable compensation support for S corporations, and board or member resolutions setting the number.
  • Basis schedules for every owner, maintained annually rather than reconstructed at sale.
  • A capitalization table and QSBS file for C corporations: the gross-asset test at each issuance, the active business representation, and stock certificates or ledger entries showing original issuance dates.
  • The state footprint: where the entity files, where it withholds, and what PTET elections it has made.
  • A calendar entry to revisit the structure every three years and whenever revenue doubles, an owner is added, a new state is entered, or federal law changes.

One more thing about advisors

The tax consequences described here are not obscure, but they sit at the intersection of three professions that rarely talk to each other. The formation lawyer files the certificate. The accountant discovers eighteen months later that the operating agreement contains a preferred return incompatible with the S election that the accountant made on the client's behalf. The financial advisor sells a life insurance policy owned by the wrong party. Nobody is wrong within their own lane, and the client ends up with a structure that no one designed.

The fix is unglamorous: have one conversation, at formation, with counsel and the accountant in the same room, and write down the reasoning. Ten pages of memo at the start prevents the reconstruction project that otherwise happens during diligence, under deadline, when the answer is expensive and the leverage is gone.

Primary authority

Entity choice is a tax question wearing a corporate-law costume. These are the provisions that actually drive the answer.

  • Treas. Reg. § 301.7701-2 and § 301.7701-3 — the check-the-box rules. An LLC is not a tax classification; it is a state-law wrapper that elects one.
  • 26 U.S.C. § 1361 — the S corporation eligibility rules: the 100-shareholder cap, the eligible-shareholder list, and the single-class-of-stock requirement that quietly disqualifies most venture-style preferred equity.
  • 26 U.S.C. § 1362 — making, and inadvertently terminating, the S election. Rev. Proc. 2013-30 is the relief procedure for a late election, and Rev. Proc. 2022-19 resolves several common inadvertent-termination problems without a private letter ruling.
  • 26 U.S.C. § 1366 and § 1367 — pass-through of items and basis adjustments.
  • 26 U.S.C. § 1372 — the more-than-2% shareholder fringe benefit rule, which is why S corporation owner health insurance runs through the W-2.
  • 26 U.S.C. § 1374 — built-in gains tax on a C corporation that converts.
  • 26 U.S.C. §§ 701–704 — partnership pass-through, and § 704(b) substantial economic effect, the reason LLC allocations can be flexible and corporate ones cannot.
  • 26 U.S.C. § 707(c) — guaranteed payments, the partnership answer to salary.
  • 26 U.S.C. § 199A — the qualified business income deduction, its wage and property limitations, and the specified service trade or business phase-out.
  • 26 U.S.C. § 1202 — qualified small business stock. Available only to C corporations, and the single strongest tax argument for incorporating.
  • 26 U.S.C. § 11 — the flat corporate rate, and half of the double-taxation math.
  • 26 U.S.C. § 1411 — the net investment income tax, and §§ 3101–3121 — employment taxes, which together decide the self-employment tax comparison.
  • 26 U.S.C. § 465 and § 469 — at-risk and passive activity limits on using pass-through losses.
  • Rev. Rul. 59-221 — S corporation income is not self-employment income, the ruling behind the reasonable-compensation planning that follows.

Related articles

This article is provided for general informational purposes and does not constitute legal or tax advice. Federal tax provisions discussed here — including § 199A and the qualified small business stock rules — are subject to legislative change, and state entity-level taxes vary substantially. Consult qualified tax counsel and an accountant before choosing an entity, making an election, or converting.