Tax Changes and Opportunities for Startups

When discussing the tax savings initiative from Main Street managers, it’s clear that, compared to the sweeping reforms under the 2017 Tax Cuts and Jobs Act, many elements of President Trump’s “One Big Beautiful Bill Act” seem only moderately progressive.

“The corporate tax rate is still set at 21%,” noted Ben Rizuto, an asset strategist with Janus Henderson. “That hasn’t changed.”

There are, however, some significant modifications aimed directly at businesses, which might encourage entrepreneurs and investors to consider forming new ventures as C corporations.

The legislation has enhanced the appeal of C corp status for startups looking to take advantage of capital gains tax exemptions under the updated Qualified Small Business Stock (QSBS) exemption rules. The cap has increased from $10 million to $15 million for shares acquired after July 4, 2025. To qualify for full exemption, investors must hold onto their shares for at least five years, but a 50% exemption kicks in after three years and a 75% exemption after four. This change allows for earlier sales without forfeiting all tax benefits—this is a shift from the previous five-year minimum holding period.

“The modification to QSBS is one of the most substantial changes we’ve seen with OBBBA,” Rizuto remarked. “For founders and early employees, it affords a means to safeguard a significant portion of their earnings, implement robust planning, and have enhanced flexibility regarding profit realization owing to a new exclusion system.”

He estimates that the increase from $10 million to $15 million could save shareholders nearly $1.2 million in taxes.

This update arrives during a new wave of IPOs, driven largely by advancements in artificial intelligence. It’s quite something—new business models forming rapidly and significant capital pouring into these ventures, greatly enriching new founders. Meanwhile, quicker-growing startups are looking to raise capital in private markets for shares they offer early employees.

“The elevated exclusion limit will empower investors to up their stakes,” Alison Flores, a manager at the H&R Block Tax Institute explained. “Concurrently, qualifying companies will have more capacity to raise funds. Overall, this will open doors for these companies to chase growth opportunities and potentially enhance value for everyone involved,” she added.

“Game Changer” for Startup Capital Formation

The recent regulations have also raised the asset threshold for C corps, now allowing companies with total assets of up to $75 million to qualify for QSBS status, up from the previous $50 million limit. This is especially appealing for companies anticipating quick growth or aiming to attract external investors.

Such adjustments could broaden access to capital, especially for rapidly growing startups, particularly those not expected to stay stagnant for long. Barbara Weltman, president of Big Idea for Small Business, a resource site for entrepreneurs, noted that these regulations generally exclude service industries, primarily benefiting businesses in technology, manufacturing, and retail.

“The expansion of QSBS represents a significant shift in how startup capital is approached,” Rizuto said. “It minimizes friction in early-stage investments, supports long-term relationships between founders and investors, and enhances both stock liquidity and tax savings.”

This could urge angel investors and venture capitalists to structure deals that maximize profits, while also fostering active support for maintaining QSBS qualifications among portfolio companies.

Although many startups, particularly in AI, are soaring past that $75 million mark, it’s crucial to note that the $75 million asset limit is assessed at the time of stock issuance, with more restrictive rules applied to shares issued before July 4, 2025.

“Valuation and total assets are not the same,” Rizuto clarified. “A startup operating from a garage with a few computers and brilliant ideas can achieve a high valuation, but that doesn’t mean its asset base is reflected in that valuation,” he explained.

Looking at Pass-through Income for S Corporations

Despite the new incentives for C corporation status, Bill Smith, national director of tax technical services at CBIZ, remarked that most small businesses not planning to reinvest profits or needing specific organizational structures should still think about establishing as pass-through entities, such as S Corporations or LLCs.

Indeed, the 2017 tax changes led numerous companies to shift toward S corp structures, as more businesses started to be taxed based on pass-through income. With C corporation owners facing double taxation—21% corporate tax on profits and additional taxes on dividends—it’s vital for founders to carefully weigh their timelines and business models before deciding on an entity type.

“To benefit fully from QSBS, you have to hold onto shares for a minimum of three years, and you’ll receive the largest tax savings after five years,” explained Stephen Stagaitis, a director of small business advisory at Clysher Miller. He added that “owners aiming to extract a significant portion of their annual profits will face notable tax impediments as C corporations.”

C corporations also need to hold regular board and shareholder meetings, submit annual reports, and keep necessary company records.

“Some may find they need to form LLCs since they can’t meet all the requirements of a C corporation,” Flores indicated.

Evaluating Exit Strategies and Business Tax Implications

Flores pointed out that management teams should view the new tax law as a chance to reassess their entity structures, take stock of their assets and liabilities, and strategize about potential changes.

When picking an entity, founders should choose one that aligns with their long-term ambitions, such as remaining private, attracting venture capital, or pursuing an IPO.

As Rizuto suggested, the C corp structure is something that serial entrepreneurs ought to think through carefully.

“If you’re just beginning and believe your business will be a success, or think there’s profit potential, going the C corp route might be wise to handle those profits effectively,” he noted.

C corp status can also be beneficial for companies exploring employee stock ownership plans (ESOP) as part of their exit strategy, and offers additional tax deferral chances if QSBS doesn’t apply, Stagaitis remarked.

“OBBBA provides more certainty regarding taxes, allowing entrepreneurs to plan more strategically for future company expansion or exit,” said Flores. “Especially experienced entrepreneurs could find value in gathering their tax, accounting, and legal teams to help pinpoint risks and opportunities as they launch new businesses post-2025.”

Founders not anticipating a fast exit through venture capital may also discover tax benefits by forming their businesses as pass-through entities. Furthermore, the OBBBA has made the 20% Qualified Business Income Deduction (QBI) available, expiring at year-end. This makes LLC or S corp designs appealing for many, particularly for startups focusing on service-based operations that don’t plan immediate exit.

“If your goal is to build a long-lasting business to pass down, it’s likely a pass-through entity will be more fitting,” Smith expressed. “However, if you’re looking to scale up your business and generate profits quickly, QSBS could be the more advantageous choice,” he added.