Techniques for Preserving Qualified Small Business Stock Benefits for Early‑Stage Investments (Part One of Two)

Entrepreneurs and investors – ranging from venture capital, PE, hedge funds or family offices – working with early-stage businesses have become increasingly familiar with the potential tax advantages of holding Qualified Small Business Stock (QSBS) under Section 1202 of the Internal Revenue Code of 1986. Although entrepreneurs and investors have become aware that qualifying investments in QSBS may reduce or eliminate federal income taxes on future exits from their investments, uncertainty remains about certain techniques for transforming existing investments into QSBS. In a two-part guest series, Neal Gerber Eisenberg attorneys Michael B. Gray, Jeffrey S. Shamberg and Eric M. McLimore detail the primary tenets and considerations for fund managers to obtain favorable tax treatment from holding QSBS. This first article discusses some techniques for converting certain existing businesses operated through non-qualifying “flow-though” or “pass-through” entities into qualified small businesses. The second article will address how fund investments, Simple Agreements for Future Equity and convertible instruments can receive and preserve QSBS status. For coverage of additional tax guidance, see “Current Tax Challenges for Funds With European Investments” (Sep. 29, 2020).

To read the full article

Continue reading your article with a PELR subscription.