What if the Corporation Wasn’t Always a C-Corp?

In order to qualify as QSBS, the corporation has to be a C-Corp on the investment date, but not before.

If the business was formed as a different legal structure (e.g. LLC, S Corporation, Partnership), the company can terminate its legal structure to re-incorporate as a C-Corp before the issuance/sale of the stock. 

Converting a legal entity raises various complications.  For example, if an entity is converting from an S-Corp to a C-Corp, it is not as simple as transferring stock for stock in the new entity as stock-for-stock transfers do not qualify for QSBS. It may be possible for the owners of the S-Corp to transfer the assets of the S-Corp to a C-Corp in exchange for QSBS under a tax-free exchange pursuant to IRC Section 351(a). If the stock received from the C-Corp qualifies as QSBS, the owners of the S-Corp will realize the QSBS tax exclusion through their S-Corp K-1. 

More on Eligible Entities

Do PBCs or B Corps Qualify for QSBS?

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.