QSBS Planning for Founders | Qualified Small Business Stock | Intentional LLC

Pre-Transaction Planning

Most founders leave millions
on the table. Not because
they planned wrong. Because
they planned too late.

QSBS is one of the most powerful tax tools available to founders. It can eliminate federal capital gains tax entirely on the sale of your company. And almost nobody knows about it until after the deal closes.

Let's talk before the deal closes

The window to use QSBS closes before the transaction does.

What QSBS actually means for you

The tax break that most
advisors mention after.

I am going to be direct with you about something that bothers me about this industry.

Section 1202 of the tax code, Qualified Small Business Stock, allows founders who started or invested early in an eligible C-corporation to exclude up to 100 percent of their federal capital gains tax when they sell. On a $10 million exit, that is a potential savings of $2 million or more. On larger exits, the numbers get significantly bigger.

And yet the conversation I have more than almost any other with founders who have already sold their company is some version of: "Why didn't anyone tell me about this before the deal closed?"

The answer is usually one of two things. Either their advisor did not know. Or they brought in an advisor too late.

"The biggest mistakes in a liquidity event are not made at the closing table. They are made in the months before it, when nobody was asking the right questions."

James Roberts, Founder, Intentional LLC

QSBS is not complicated in principle. The stock must be in a domestic C-corporation. The company's gross assets must have been $50 million or less when the stock was issued. The founder must have held the stock for more than five years. And the company must be in a qualifying trade or business.

But the details matter enormously. Whether you organized as an S-corp or LLC instead of a C-corp. Whether you ever converted. When shares were issued relative to the asset threshold. Whether your state conforms to the federal exclusion. These are decisions and structures that have to be in place before the transaction. Some of them have to be in place years before.

This is why I always say the same thing to founders who are thinking about selling in the next few years: the conversation we need to have is not about the deal. It is about what needs to be true before the deal even starts.

What I actually do with founders on QSBS

When I sit down with a founder who is thinking about a liquidity event, one of the first things I want to understand is the structure of their company and when their shares were issued. From there we can assess whether they have a QSBS position, whether they are approaching the five-year threshold, and whether there are strategies like gifting shares to family members or trusts to multiply the exclusion.

I also want to understand the rest of the picture. Because QSBS is one piece of a larger planning conversation that includes concentrated wealth, charitable vehicles, capital deployment, and what life actually looks like after the sale. I have never met a founder for whom the tax question was the only question worth answering.

If you are a founder thinking about selling in the next one to five years, the time to have this conversation is now. Not when the LOI is signed. Now.

Keep reading

Related topics worth
understanding.

Liquidity Events

What happens before, during, and after the deal closes

Pre-Transaction Planning

The work that has to happen before the letter of intent is signed

Founder Psychology

What nobody prepares you for after the wire hits

Common questions

What founders ask about
QSBS before the deal.

  • Qualified Small Business Stock, or QSBS, is a provision under Section 1202 of the Internal Revenue Code that allows founders and early investors in eligible C-corporations to exclude up to 100 percent of federal capital gains tax on the sale of their shares, up to $10 million or 10 times the cost basis, whichever is greater. It is one of the most significant tax benefits available to founders, and most people either do not know it exists or find out about it too late to use it.
  • To qualify for QSBS treatment, the stock must have been issued by a domestic C-corporation with gross assets of $50 million or less at the time of issuance. The stock must have been acquired directly from the company, not on the secondary market. The holder must have held the stock for more than five years. And the company must be engaged in a qualified trade or business, which excludes certain service industries. The rules are specific, and whether your company and shares qualify depends on how and when the business was structured.
  • Most founders miss QSBS because they do not learn about it until after the deal is done. By that point, it is too late. The exclusion must be planned for before the transaction closes, and in many cases before the five-year holding period even begins. If the company was structured as an S-corporation or LLC and never converted, the shares may not qualify at all. If shares were issued after the gross asset threshold was exceeded, they may not qualify either. These are decisions that have to be made early, which is exactly why pre-transaction planning matters.
  • For a founder selling a company for $10 million or more, QSBS can eliminate federal capital gains tax entirely on qualifying shares, which at current rates represents a savings of 20 percent or more on the gain, before accounting for state taxes. For larger exits, strategies like stacking QSBS across family members or trusts can multiply the exclusion. The exact savings depend on the size of the transaction, the cost basis, the holding period, and the state in which the founder resides.
  • In most cases, no. The structural requirements for QSBS eligibility need to be in place long before a transaction is announced or closed. Once a letter of intent is signed, most of the planning options narrow significantly. The five-year holding period requirement alone means that QSBS is inherently a long-horizon strategy. That said, there are situations where partial planning is still possible mid-process, and even modest action is better than none. The earlier the conversation starts, the more options remain on the table.

Start the conversation

The window closes
before the deal does.

If you are thinking about selling your company in the next one to five years, now is the time to understand your QSBS position. Schedule a conversation with James.

Schedule a conversation

30 minutes. No pitch. No pressure.