This comes up all the time: “What type of company should I form? I heard LLCs are the best.” Many investors and tax professionals, especially venture funds, avoid LLCs due to tax complexity and structural limits. Instead, consider a C-Corp for the Qualified Small Business Stock (QSBS) tax exclusion.
QSBS allows qualifying stockholders to exclude up to $10 million, or 10 times the adjusted basis of stock sold, from federal capital gains taxes.
To qualify, your company must be a C-Corporation with under $50 million in assets at issuance, and the stock held for at least five years in a qualified active business (most professional services are excluded).
If QSBS is part of your strategy, speak with a tax professional for a 1202 Letter. This opinion explains why your stock should qualify under Internal Revenue Code Section 1202, outlining your company’s structure, assets, and activities. While not an IRS guarantee, the letter offers comfort to investors, employees, and partners, signaling a QSBS-friendly capital structure that differentiates your startup.
Building a C-Corp with QSBS in mind may position stock as favorable compensation. Savvy investors may be more inclined to participate. For IP holders, deals can combine equity with royalties, creating tax-advantaged upside.
Even with a 1202 letter, tax outcomes aren’t guaranteed; rules are complex and evolving. Consult a tax expert before relying on QSBS – THIS POST IS NOT TAX ADVICE.
QSBS isn’t a magic bullet, but for the right startup, it’s a powerful planning tool enhancing investment appeal, employee retention, and deal structure.
If you’re IP-heavy (looking to sell to a QSBS company) or plan to raise capital, a C-Corp can unlock significant tax advantages in certain situations.
