The owner of a Dallas law firm is thinking about splitting his business in two. The chief executive of an Illinois home-health-care provider was advised to slow franchise expansion. A Maryland publisher might change from a closely held corporation that distributes all profits to shareholders.

The common denominator for all three: Looming changes in the tax code have left them uncertain about how to organize themselves.

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The owner of a Dallas law firm is thinking about splitting his business in two. The chief executive of an Illinois home-health-care provider was advised to slow franchise expansion. A Maryland publisher might change from a closely held corporation that distributes all profits to shareholders.

The common denominator for all three: Looming changes in the tax code have left them uncertain about how to organize themselves.

Republican lawmakers reached a compromise Wednesday on a tax overhaul, with final votes in the House and Senate next week and delivery to President Donald Trump’s desk before Christmas. The new rules could take effect in January, encouraging business owners to move quickly to take advantage of them.

The core of the plan is a vast reordering of U.S. business taxation, not only for big corporations like Apple Inc. and Walmart Stores Inc. but also for millions of partnerships, limited-liability companies and other so-called pass-through companies that pay tax through individual rather than corporate returns.

The tax bill would lower corporate tax rates to 21% from 35% and lower the top individual rates to 37% from 39.6%. It would also create a new system for pass-through firms that would exist in a gray area—part business and part individual. The Senate and House both want to lower these entities’ taxes, too, but have different ways of doing it.

The details of the compromise reached Wednesday will be released later this week and some numbers could change.

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The new pecking order of business and individual taxation could lead to a new era of business reorganization and tax-code gamesmanship with unknown consequences for the economy and federal revenue collection.

Mazin Sbaiti, the Dallas law-firm owner, is thinking about breaking into two businesses: one that provides legal services, the other certain functions like printing and copying.

He doesn’t want to reorganize but might do so to best position himself to pay lower taxes. The House and Senate plans sharply limit legal practices like his from benefiting from a new low tax rate for partnerships. As a workaround, Mr. Sbaiti would wall off the parts of the business that don’t directly provide legal services in an order to get lower rates for those profits.

“We seem to be punished under this new tax bill,” he said of law firms.

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Pass-through firms want lower rates just like corporations, and they have political clout. But law firms show how these businesses are a challenge for tax writers. Should partners be treated like high-income individuals taxed near 40%, or business owners taxed closer to 21%?

The House plan would create a 25% rate for pass throughs, but with guardrails controlling who can get it. The Senate plan would give pass-through business owners steep discounts from individual rates, also with a thicket of rules dictating how the discounts are applied. Lawmakers say the final version may more closely resemble the Senate’s version but perhaps have some of the House’s features, including the ability for firms with more capital investment to get bigger deductions.

“There are going to be a lot of people looking into what they can do for themselves,” said Daniel Shaviro, a New York University law professor. He and 12 other lawyers outlined in a paper last week potential tax-avoidance steps businesses could take under a new law. It has been downloaded more than 20,000 times.

The big focus in Washington this week is going to be how fast can Congress begin to move to wrap up a tax bill. WSJ's Gerald F. Seib explains some factors standing in the way and how likely it is a bill will get passed by Christmas. Photo: Getty (Originally published Dec 5, 2017)

Any new rules are likely to take effect Jan. 1 with little formal guidance from the Treasury Department and Internal Revenue Service on how they would be applied.

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Tax advice that worked for decades is getting flipped on its head.

For years, business owners avoided traditional corporate classification because it meant a second layer of dividend taxes up to 23.8%. Low individual rates made the pass-through structure attractive, especially after 1986, when top rates were cut to 28% before climbing to today’s 39.6%.

Now, with a prospective corporate rate at 21%, some pass-through businesses are considering reorganizing to take advantage of that low rate.

Anik Singal, the owner of Lurn.com, a Germantown, Md., publishing company that teaches and trains entrepreneurs, is planning to shift to a C-corporation subject to a 21% tax on profit. It is now an S-corporation, which means its shareholders pay taxes on the company’s profits at their individual tax rates. “We are doing the switch for tax savings,” said Mr. Singal. “That’s the only reason.”

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“Our planning for clients is completely turned around,” said Tom Wheelwright, founder of Tempe, Ariz., accounting firm ProVision PLC.

It is turning for his own business, too. Like Mr. Sbaiti’s law firm, Mr. Wheelwright’s accounting firm is considering separating its educational-products business, to qualify for the lower pass-through rate, from its accounting services, which would face limitations from lower rates.

Key differences exist between the House and Senate plans, and the final design choices will have big effects on how individuals and businesses behave.

Under the House plan, passive investors in many pass-through businesses are rewarded with a 25% tax rate, less than people who actively run their firms. If that feature becomes law, that would incentivize business owners to pull back from day-to-day involvement, unlike current law, which tilts against passive ownership by subjecting passive investors to less favorable treatment on business losses.

The House plan also rewards individuals who invest capital in their businesses. That might spur them to switch from, say, leasing equipment to owning it.

The Senate plan, on the other hand, rewards firms that have big payroll expenses. That could incentivize firms to switch from using independent contractors to putting more workers on their own payrolls.

The Senate plan also allows the pass-through tax break for individuals in law and accounting partnerships who make $250,000 or less when filing as singles or $500,000 when filing as married. To get more favorable treatment, law firms themselves might reorganize as corporations to get the 21% tax rate, said David Miller, a partner at Proskauer Rose LLP in New York. Then associates making under those thresholds would join sister partnerships that reward them with lower individual rates.

“This is a topsy-turvy world where the associates become partners and the partners become corporations,” Mr. Miller said.

A 2012 rewrite of the Kansas tax code offers a warning sign. The state eliminated the state income tax on pass-through business. There was a small increase in new businesses, but it all appeared to be from firms with less than $5,000 in expenses a year, said Jason DeBacker, assistant professor at the University of South Carolina’s Darla Moore School of Business. That wasn’t the result of business formation. Instead, he said, it seemed to largely result from individuals reorganizing themselves to shift existing wage income to business income. The tax changes were largely reversed this year when they didn’t produce the hoped-for gains in business activity.

Shelly Sun, chief executive of BrightStar Group Holdings Inc., a home-health-care franchiser, has been advised to put franchise expansion on hold and look at opportunities outside the company’s core health-care business. That’s because of provisions in the tax rewrite that limit personal service businesses from taking advantage of lower pass-through rates.

Ms. Sun said she could look for ways to help franchisees get around the requirements, but worries about running afoul of the IRS. She also worries congressional sentiment might change and leave her company on the hook for legal fees and large tax bills later.

“We are not going to take that liability,” she said.

Write to Richard Rubin at richard.rubin@wsj.com and Ruth Simon at ruth.simon@wsj.com