QSBS Restructuring Planning Strategy for Founders & Business Owners

Under Section 1202 a qualified small business must be an operating company that is structured as a C Corporation. Even if the company was founded under a different legal structure the company can be restructured as a C Corporation and issue QSBS with the five-year timeline starting on the day of issuance. The ability to restructure opens an opportunity for founders or business owners to maximize their QSBS gain exclusion.

For example, a company could be founded with assets worth $1M under an LLC legal structure taxed as a partnership. Over time the business is successful, bolstering the balance sheet with a fair market value (FMV) of assets worth $50M. The business owner can take advantage of a Section 351 tax-free transaction by incorporating a new entity as a C Corporation under Section 351 and transferring the LLC’s assets for newly issued QSBS tax-free. Under Section 1202(i) the business owners can contribute appreciated property in exchange for QSBS with the basis being no less than the FMV. Therefore, the business owner would have a basis of $50M in the newly issued QSBS instead of the $1M original basis as well as paying no taxes on the appreciated property. This restructuring strategy would give the business owner an eligible gain exclusion of up to $500M ($50M x 10) instead of $10M ($1M x 10).

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.