Good Morning!

1. Feature: What Businesses Should Consider Using a C Corp Instead of an LLC? (4 min)

2. From the Archive: How To Assign Your LLC Ownership Interest To Your Revocable Trust

3. Dear TCoL: Properly Transferring a Digital Asset Wallet to an LLC

Take this Sunday to recharge for the week to come.

-TCoL

Missed our last feature article? Cash Flow Forecasting Errors That Sink New Ventures

Many small business owners default to an LLC. It is flexible, inexpensive, and simple. But as a business grows, the right choice becomes less obvious. In 2025, with changes to the Qualified Small Business Stock rules and the reality of multi-state operations, it is worth asking whether a C corporation makes more sense for your long-term goals.

One important point. An LLC can elect to be taxed as a C corporation by filing IRS Form 8832. That election changes tax treatment but does not turn membership interests into corporate stock. To qualify for benefits such as the Qualified Small Business Stock exclusion, you need stock of a domestic C corporation acquired at original issuance. If an LLC later converts into a corporation in a tax-free contribution, stock received at that conversion can be qualified, but the holding period (discussed below) begins at conversion.

The problem of double taxation

The most common objection to C corporations is double taxation. The corporation pays a 21 percent federal tax on its income. When profits are distributed as dividends, shareholders pay a second layer of tax at capital gains rates of 0, 15, or 20 percent, plus a 3.8 percent net investment income tax for some taxpayers. Add state taxes and the combined burden can be significant.

Pass-through entities, such as LLCs taxed as partnerships or S corporations, avoid this. Income flows directly to the owners and is taxed once at individual rates, subject to self-employment or payroll taxes. If your plan is to take out most profits every year, the pass-through model often delivers a lower effective tax rate. If your plan is to reinvest earnings or aim for a stock sale, the corporate model may win.

Multi-state operations

Pass-through owners can be pulled into multiple state tax filings. Many states require nonresident owners to file returns, and not all states allow composite filings. Some states also impose withholding on distributive shares. Pass-through entity tax elections can help with the federal SALT deduction cap, but they add complexity.

A C corporation centralizes filings at the entity level. Shareholders generally only face tax in their home state when dividends are paid or shares are sold. For a business expanding into multiple states, this simplification can save significant time and money.

So, a common strategy is to start as an LLC while operating in one or two states, then elect C corporation taxation once revenue grows and multi-state filings become too burdensome.

The power of QSBS

The Qualified Small Business Stock exclusion under Section 1202 of the Internal Revenue Code applies only to C corporation stock. The July 2025 One Big Beautiful Bill Act expanded the rules. Stock issued after that date can qualify for a 50 percent exclusion after a three-year hold, 75 percent after four years, and 100 percent after five years. The per-issuer cap is now 15 million and the gross assets threshold is 75 million.

Stock issued on or before July 4, 2025 remains subject to the prior framework, which required a five-year holding period and carried a 10 million per-taxpayer cap or ten times basis, with a 50 million asset threshold.

Not every business can qualify. Section 1202 excludes law, engineering, accounting, consulting, financial services, health, and other trades where owner reputation or skill is the primary asset. And not every state conforms. As of 2025, California, Pennsylvania, Mississippi, and Alabama do not conform, and New Jersey conforms only for sales after January 1, 2026. These rules are technical and must be reviewed carefully by a tax professional.

Want to accumulate cash/investments?

C corporations allow earnings to remain inside the entity without immediate tax to shareholders. This helps fund growth and creates discipline for reinvestment. Owners are taxed when dividends are paid or when they sell their stock.

The IRS has guardrails. The accumulated earnings tax applies if a company retains profits without a reasonable business need. The personal holding company tax applies if a corporation primarily earns passive income and is closely held. Both restraints are manageable with proper planning.

Pass-throughs handle this differently. Income flows through whether or not cash is distributed, which can leave owners with tax bills but no cash. Many professional firms resolve this by distributing nearly all cash at year end, which makes reinvestment harder. It also causes the business to start off each year cash starved.

Comparing tax rates

The corporate rate is 21 percent. The top individual rate is 37 percent through 2025. Beginning in 2026, the One Big Beautiful Bill Act makes the 20 percent Qualified Business Income deduction permanent and raises the phase-in thresholds. That narrows the difference between corporate and pass-through rates.

For owners who take out profits each year, the pass-through model often produces lower tax. For owners who reinvest and plan for an exit that qualifies under Section 1202, the corporate model may yield a far better after-tax return.

Raising capital and granting equity

Institutional investors and venture funds tend to prefer C corporations. Corporate blockers prevent unrelated business taxable income and effectively connected income from flowing through to sensitive limited partners. Stock options, cap tables, and governance rules are standardized and familiar.

LLCs can grant profits interests and complex allocations, but they require extra explanation for employees and investors. If you plan to raise capital or grant broad employee equity, the C corporation form reduces friction.

Governance and culture

LLCs are flexible, but that flexibility often translates into complexity. Custom allocations, bespoke rights, and year-end distributions can complicate decision-making.

A corporate structure is more standardized. That predictability helps when dealing with lenders, acquirers, and new shareholders. It also supports long-term reinvestment instead of a culture of mandatory year-end cash-outs.

A practical decision framework

Ask yourself these questions. Will your business expand into multiple states? Will you raise institutional capital? Will your industry qualify for Section 1202? Do you want to reinvest earnings instead of distributing them? Is your long-term strategy to sell stock rather than assets?

If most answers are yes, a C corporation deserves serious consideration. If most answers are no, an LLC taxed as a partnership or S corporation may be the better fit.

And remember, you can begin as an LLC and later elect C corporation taxation or convert to a corporation when the timing is right.

The best choice is the one that fits your growth and your planned exit.

Disclaimer: This article is for informational purposes only and is not tax or legal advice. Section 1202 is technical, and state laws vary. Always consult a qualified tax advisor before taking action.

Dear TCoL: Properly Transferring a Digital Asset Wallet to an LLC

Question: I saw where someone posted online to “list the wallet address, asset type, quantity, and value on the LLC capital contributions page and get it notarized. Now the LLC owns that wallet.” Is this correct?

Answer: No. Simply listing a wallet address, asset type, quantity, and value on an LLC’s capital contributions page, even if notarized, does not make the LLC the legal owner of the underlying digital assets. Ownership of digital assets follows control. If the assets remain in a wallet tied to your personal exchange account or private keys, you still own them, not the LLC.

To transfer ownership correctly, you must both document the contribution under state law and put the LLC in control of the asset.

Start with the legal framework. State law governs how property is contributed to an LLC, regardless of whether the transfer involves digital assets or a pickup truck.

Create an LLC-controlled wallet. The asset must move from your personal control into the entity’s control. That can be done with a new wallet created for the LLC, with seed phrases or keys stored as company property under a written custody policy. A multi-signature arrangement where the LLC members are signers can also work. Under the new UCC Article 12, crypto is a “controllable electronic record.” Legal rights follow control, so the LLC must actually control the asset.

Document the transaction. Prepare a company resolution authorizing the LLC to accept the specific digital asset. Draft an assignment of the digital assets that identifies the digital asset, amount, and the addresses involved. Have the LLC formally accept the contribution and update the capital contribution schedule. Notarization is rarely required under state law, but thorough written evidence plus control is what matters.

Dive deeper into our previous articles about properly documenting the transfer of personal assets to your LLC: 

• How to Contribute Non-Cash Assets to Your LLC

• The Initial Resolution You Need After LLC Formation

Transfer the asset. Move the digital assets into the LLC wallet or deposit them into the LLC’s exchange account. Keep the transaction ID with the contribution paperwork. This proves that control passed to the entity.

Understand the tax treatment. If the LLC is single-member and disregarded, contributing personal digital assets to it usually does not trigger tax because you and the entity are the same taxpayer. If the LLC is multi-member and taxed as a partnership, contributions of property are generally nonrecognition events under IRS Code Section 721(a). Built-in gain is tracked under section 704(c). Beware that exceptions do exist, including contributions to an investment company under section 721(b).

Always confirm tax treatment in advance of the transfer with a CPA who understands digital assets.

Record value carefully. Note the U.S. dollar value at the time of the transfer for capital account and basis purposes. Keep evidence of the price source and the on-chain transaction ID. This recordkeeping will matter when assets are sold or distributed.

The bottom line. You cannot effectively make an LLC the owner of your digital asset by simply writing the wallet address into its contribution schedule. Set up a new, LLC-controlled wallet or account, document the assignment, and then move the assets to the new wallet. 

We would strongly encourage you to coordinate the transfer with a lawyer in the state of formation and a CPA with crypto experience.

Hope this helps!

Have an interesting business question and need a free bit of advice? Send your question to [email protected]. No confidential info, please!