Startups and the OBBBA: Rethinking C corporation vs. passthrough
May 31, 2026
From Peter Diakovasilis, CPA, MST, and Ryan Steinberg, CPA, Melville, N.Y.
Editor: Jeffrey N. Bilsky, CPA
Every startup begins with a handful of questions, and one of the most consequential is deceptively simple: What entity should we choose? That decision shapes how capital is raised, how founder and investor economics play out, how to design employee equity, and what the tax bill looks like upon exit.
For years, venture–backed companies defaulted to C corporations to unlock qualified small business stock (QSBS) gain exclusion under Sec. 1202, while bootstrapped or profitable businesses favored passthroughs to take advantage of the Sec. 199A qualified business income (QBI) deduction and manage self–employment tax, all while maintaining flexibility with exit strategies. The law known as the One Big Beautiful Bill Act (OBBBA), H.R. 1, P.L. 119–21, reset the table, as the corporate rate under the Tax Cuts and Jobs Act, P.L. 115–97, and Sec. 199A QBI deduction are now permanent, QSBS eligibility is expanded, and the transfer tax landscape is more generous. The result is a new calculus for entity choice, equity design, and exit timing.