Common Equity and QSBS

Common Equity QSBS

For any security to qualify under Section 1202 as Qualified Small Business Stock, the company must first be considered an eligible Qualified Small Business (QSB) meaning:

The securities themselves must also satisfy certain criteria including:

  • They were acquired at original issuance
  • They were acquired in exchange for money, other property (not including stock), or as compensation for services provided to such corporation
  • They were held for a minimum of five years

For each security type however, when the 5-year holding period begins is determined based on nuances particular to each security type. Depending on the security type the holding period might begin on the purchase date, the exercised date, vesting date, etc. 

What is Common Equity

Common Equity is the total amount of investments produced in a company from all common stockholders including, but not limited to, paid in capital. When measuring Common Equity, the individual should not account for Preferred Equity (i.e. preferred stock). Common Equity, or common stock, is usually held by company founders or company employees in the event that employees have the option to purchase stock. This security type has very few shareholder rights in comparison to other security types, and in the event of profit distribution (upon a company’s failure, etc.), common stock has the lowest priority. However, Common Stocks do sometimes out perform Preferred Stocks in the long-run.

Common equity is equal to the sum of the common stock plus the retained earnings plus any surplus capital. 

Common Equity and QSBS

In order for common stock to qualify for QSBS under Section 1202, the shares must have been purchased directly from the issuing company and cannot have been acquired in a secondary transaction. Among many other things, the company where the Common Stock was acquired has to satisfy all Section 1202 requirements and the shareholder must hold the Common Stock for a 5-year holding period. To learn more about the difference between Common Stock and Preferred Stock, see QSBS Expert’s article on Preferred Stock here.

This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.

About QSBS Expert

QSBS Expert was founded by a group of entrepreneurs, investors, accountants and lawyers who came together when trying to navigate a QSBS situation of their own. We quickly realized that the regulations left a lot of open questions and the publicly available information was confusing to sift through…so we thought that others may also benefit from having a “go to” resource for all things QSBS.