Should You Convert Your Business to a C Corporation?

One of the biggest questions after the passage of tax reform is whether business owners should convert their pass-through entities to C Corporations to take advantage of the lower 21% tax rate. The answer to this question depends on your business goals. If your goal is to pass as much profit to yourself as possible, you should generally stick with the pass-through entity.

The tax reform legislation lowered the tax on C Corporations to a flat 21%. Individual tax brackets were also lowered, with the top rate being 37%. It’s easy to say that 21% is less than 37%, so C Corporations must be the better choice. However, this overlooks two important details. First, C Corporations create a double tax event when profits are distributed to shareholders. Second, owners of pass-through businesses received a new deduction under Section 199A.