> This defers taxes and allows the funds to be reinvested without tax.

All business funds are re-invested without tax, this is actually a good thing. Also for the majority of business owners taking a loan against your assets to pay yourself is a terrible idea, yes it may defer taxation but that tax will still come due and now you have to pay interest.

> Someone who owns their own business could also easily drop their salary significantly for the year prior to applying to college.

This could be a problem but i think the amount of difference this would make would be negligible - most people don't plan like this. You could also emancipate your 17 year old or have them live independently for a period of time (my friend actually deferred his entry and worked for a year in order to get a full ride)