Qualified Small Business Stock Exclusion

by a searcher from Wake Forest University

3 weeks ago

Hi all,

I am in the early stages of determining the structure for my self funded search. (have a deal under exclusivity). I am learning about the QSBS structure and curious why this structure isn't used more frequently. It seems that the structure makes a ton of sense if you have a 5-7 year hold period and do not plan to take distributions ahead of exit (e.g. use max leverage for the initial purchase and paydown debt during 5 year hold or use cash for growth), 

Are there any considerations that folks are concerned about? I'm aware of (i) the stroke of pen risk and that some members of congress are trying to eliminate this exclusion (though I think fairly easy to switch to S Corp if the exclusion is eliminated from tax code), (ii) double taxation given you need to structure as C-Corp (though non-issue if you don't take distributions), and (iii) some business are excluded from this exclusion (financial, tax, etc.).

Thanks all in advance for the help!

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professional from Harvard University

Almost all transactions in the lower middle market are going to be asset deals and not stock deals. For many people, the relatively low possibility of a tax-free exit isn't worth the cost of double taxation along the way. Model out the accounting carefully before going the C-corp route.

5 days ago | like reply | 0 likes

searcher from Babson College

It's a very interesting exclusion, I haven't dug into the details of it in a year or two... but would you still be able to do a dividend recap? That way you could focus on debt pay down for the first several years and then do a larger recap (hopefully at lower rates than current) thus avoiding the double taxation issue.

6 days ago | like reply | 0 likes

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