The 20 percent corporate tax rate in both the House and Senate tax bills creates a huge benefit for growing companies that are reinvesting earnings. Businesses now taxed as flow-throughs — which includes S corporations and entities taxed as partnerships, such as LLCs — may stampede to become so-called C corporations if and when the pending tax legislation is enacted.

Most privately owned businesses have migrated to flow-through tax status in the last 20 years primarily to avoid the double tax regime for C corporations. Current tax law imposes a small penalty on flow-through owners for avoiding double tax, i.e. a 39.6 percent rate for individuals versus a 34-35 percent rate for corporations on current earnings (and a combined double tax burden in excess of 50 percent). But the pending tax legislation may materially change this, making C corporation status irresistible, particularly for fast-growing enterprises.

The Senate and House tax bills have very similar structures, making enactment very likely, but the bills vary in important ways. What happens in the midnight political knife fight to arrive at a final bill may determine which direction a business should go.

While both bills provide for a 20 percent tax rate for C corporations, the maximum tax rate on flow-throughs is under 30 percent under the Senate bill and 25 percent for passive income under the House bill. Curiously, flow-through tax rates under the House bill are higher for active owners of flow-throughs. These rates are the critical part of the final political calculus.

But becoming a C corporation can be a one-way street creating significant future tax pain with no easy way out. C corporation tax pain hits when it's time to return earnings and appreciation to shareholders, as such amounts are taxed a second time, triggering combined federal tax rates which often exceed 50 percent. In contrast, owners of flow-through businesses are taxed once on company income, including 20 percent long-term capital gains on goodwill when the business's assets are sold. Again, pending legislation will dramatically change these numbers and companies need to consider these issues to remain competitive.

Once a business is taxed as a C corporation it can be painful to change back to flow-through tax status. A C corporation whose shareholders are U.S. individuals (or trusts for such persons) may be eligible to be taxed as a flow-through via an S election, but will be exposed to corporate-level tax for five years on so called built-in gain as of the date of the S election. A C corporation with multiple classes of stock or shareholders who are not U.S. individuals may not be able to make an S election and will trigger potentially devastating corporate and shareholder-level taxes if converted to a flow-through entity.

The C corporation double-tax regime may make selling the assets of a company prohibitively expensive. A stock sale avoids the double tax, but shifts the seller's double-tax problem to the buyer, who will likely exact some form of tax haircut to the purchase price.

A decision to move from flow-through taxation to C corporation status should consider several items, some of which can be computed once final legislation is passed but others are subjective nontax items. Computable items include (i) federal tax rate differential on current income including effective rates, (ii) federal tax rate on dividends and distributions to owners, (iii) effect of state and local income taxes, particularly on income of flow-through entities, and (iv) tax items unique to the business and its owners such as non-U.S. earnings and the alternative minimum tax. Subjective items include (i) the timing and amount of future distributions to owners, (ii) the timing and amount of gain on a sale of the business, (iii) the ability to avoid C corporation double tax via a future S election or other exit strategies, and (iv) likely exit strategies and the tax posture of any potential buyers.

Once the political dust settles on tax legislation, each business should promptly assess its tax structure to maximize its after tax return to its owners. The effective date of tax changes is likely Jan. 1, 2018, with limited ability to change a company's tax status retroactively. Modeling alternative outcomes is the most effective way to make the best decision. Simply listing the pros and cons often masks the dollar effect of variables and may not identify sometimes significant issues. General counsel can be a critical member of the team by helping establish the underlying assumptions and future expectations for the business and its owners.

John Ransom is a transaction and tax lawyer in the Houston office of Jackson Walker, where he leads the firm's Houston corporate practice group. Also a CPA, he advises business clients on the tax and other aspects of choice of entity, acquisitions & dispositions, capitalization & financing alternatives and management equity incentives.