Experience using C Corp and pursuing QSBS for SMB acquisition?

April 26, 2024

by a searcher from Stanford University in Orlando, FL, USA

Has anyone made this decision in order to be able to take advantage of QSBS capital gains tax exemptions, vs. using a pass-through entity? Would love to compare notes with you if so. Considering this for business currently under LOI.

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Reply by a professional
from University of Michigan in Detroit, MI, USA

Hi ^redacted‌, my firm (groundswell.law) has worked with clients on this issue before (more specifically, our tax attorney). At a high-level, QSBS (while being one of the greatest tax breaks around) is generally only worth pursuing if you are looking to rapidly grow and exit. The reason being that a c-corp is less tax efficient then a pass-through entity meaning you'll lose more on taxes than potentially gain in savings (this argument has less force today given the lower corporate tax rate, but who knows what will happen given the current political climate).

So, fast growing tech company? QSBS may be your thing. Looking to buy and operate a standard SMB? Possibly not, especially when you factor in the additional costs of getting everything setup.

Ultimately, make sure you seek tax counsel before making this decision. Happy to chat further, if I can be helpful. Feel free to reach out here or by email at redacted

Reply by an intermediary
from The Johns Hopkins University in Gainesville, FL, USA

When assisting a buyer (or seller) in deciding how to structure a potential purchase (or sale), I model the differences in NPV and IRR for stock sales versus asset sales. Keep in mind that a purchaser loses the tax benefits of goodwill amortization in a stock purchase. Thus, their offer should be less. However, because those benefits accrue over 15 years, they must be discounted. For deals on the seller's side, discounting is less important when a large majority of the purchase price is paid at closing.
This is a really good example of the importance of having (and modeling!) a plan BEFORE you submit an LOI. Knowing your time frame is critical. Understanding discount rates and estimating yours is critical. Modeling your cash flows from startup to sale under both a C-Corp and a passthru scenario will help you understand the optimal course of action, subject of course to the limitations of your model.

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