In 2018, when former President Trump was in office, the corporate tax rate dropped sharply from 35% to 21%, and businesses celebrated. President Biden promised early on to raise it again, but that proved a difficult feat and has not happened to date. The administration’s most recent budget proposed a 28% tax rate. And in a recent statement, the Harris campaign proposed raising the corporate tax rate to 28%, reinforcing President Biden’s proposal.

A lot of money is at stake. Some members of the Committee for a Responsible Federal Budget say Harris’ proposed rate hike could reduce the U.S. deficit by more than $1 trillion over a decade. The Congressional Budget Office projected that a one percentage point increase in the corporate tax rate would equal about $100 billion over a decade.

In addition to a 28% corporate tax rate, Vice President Harris has proposed ending foreign tax havens by taxing offshore corporate income at the same rate as domestic income. These plans would likely face opposition in Congress, but they show a clear partisan divide. But what impact would this have on small businesses and the decisions new companies must make?

For a long time, when an individual outgrew a sole proprietorship, a corporation was the norm. In recent decades, however, uniform taxation of small business limited liability companies (LLCs) became popular. Since 2018, however, the 21% tax rate for corporations has prompted a reconsideration of these issues. A 21% tax rate versus 28% likely raises more specific questions. And if you have a corporation—one you created or inherited—should it be an S corporation or a C corporation?

All corporations are C corporations (under subchapter “C” of the tax code) unless they apply for S corporation status. If you do nothing, your business is a C corporation. Whether S or C, a corporation is entitled to limited liability. That’s traditionally one reason why businesses form a corporation. It’s also a structure that people understand. It’s a separate legal entity owned by shareholders and governed by a board of directors that elects executives to run the business on a day-to-day basis.

But C or S status is all about taxes. File a unilateral S election with the IRS and it is taxed almost like a partnership or LLC. A corporation can be taxed as a C corporation for many years and then switch to S status. Alternatively, it is taxed by filing the S election when it is first incorporated. never be a C corporation. This way, it does not have to worry about the built-in profit tax when converting from C to S.

A C corporation’s income is taxed twice. The corporation pays taxes on its net income — currently 21%. Then shareholders also pay taxes on distributions. An S corporation’s income is taxed once, at the shareholder level, usually like an LLC or partnership. An S corporation can have no more than 100 shareholders, only U.S. citizens and resident aliens, generally individual shareholders, and a calendar tax year. If there are multiple classes of stock, only differences in voting rights are allowed. For most small businesses, these criteria are easy to meet.

If the owners are more comfortable with this type of business than with an LLC, an S corporation may be a good choice. However, the accounting rules for S corporations are complicated and it is difficult to convert for existing C corporations. An S corporation may be subject to corporate income tax if it was previously a C corporation and elected S status within the past 5 years (this is the tax on built-in gains mentioned above). Many of these rules can be avoided if you start with an S corporation. To do this, file your S election within 75 days of forming your corporation.

How do you weigh the pros and cons of your facts? Often, C corporations are not the best choice for small businesses. The main reason is double taxation of income and sales proceeds. Plus, you want to personally claim any losses you incur, which benefits an LLC or S corporation. However, a big reason many small businesses like C corporations is the $10 million qualified small business stock allowance that some can receive. In 2021, it looked like this might be repealed or significantly changed. But it’s still on the books and can be a good reason to form a C corporation, even at a 28% tax rate.

Also, thanks to the wisdom of Silicon Valley, some startups start out as LLCs so the founders can take advantage of tax benefits, then move to C corporation status when they have a chance at the QSBS exemption. Companies large and small will definitely be following the tariff discussions.