QSBS

Only C-Corps Can Issue QSBS — and That’s a $15 Million Reason to Care

Choosing the wrong entity structure can cost startup founders millions. Only C-corporations can issue Qualified Small Business Stock (QSBS) under Section 1202. Here’s why that matters — and how to preserve your shot at the $15 million tax exclusion.

Joe Wallin

09 Oct 2025 — 1 min read

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For founders, one early decision can be worth millions: choosing the right entity structure.

Under Section 1202 of the Internal Revenue Code, holders of Qualified Small Business Stock (QSBS) can exclude up to $15 million (or 10× their investment basis, whichever is greater) of gain from federal income tax when they sell their shares — but only if the stock was issued by a C-corporation.

Why It Matters

When you sell your company, the QSBS exclusion can mean the difference between keeping your full $15 million gain or paying several million in federal tax. But the rule is strict:

Only U.S. C-corporations can issue QSBS.
LLCs taxed as partnerships, partnerships, and S-corps do not qualify.
To receive the full 100% exclusion, you must hold the stock for more than five years.
3 to <4 years: 50% exclusion
4 to <5 years: 75% exclusion
The company’s gross assets must not exceed $50 million before mid-2025, or $75 million for stock issued after July 4, 2025, per the One Big Beautiful Bill Act (OBBBA) update.

Why Startups Care

Most venture-backed companies are Delaware C-corps for a reason. Venture funds and experienced angels know QSBS can dramatically improve their after-tax returns. Incorporating as a C-corp also starts the five-year QSBS clock immediately — a quiet but crucial tax-planning move.

The $15 Million Mistake

If you form as an LLC taxed as a partnership, an S-corp, or a partnership, you cannot issue QSBS. Converting later doesn’t fix it retroactively. The five-year clock does not start until you are a C corporation, and if you start as an S-corp your founder shares will never qualifiy. That’s a self-inflicted, multi-million-dollar penalty for founders planning to raise capital or sell.

The Takeaway

Only C-corps can issue QSBS. That single fact can mean a $15 million swing in your pocket at exit.

If your goal is to raise money and eventually sell your company, start as — or convert early to — a C-corporation. The QSBS advantage is simply too valuable to miss.

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Can Insurance Agencies Qualify for Section 1202 QSBS? Understanding Recent IRS Guidance

Section 1202 and the Excluded Business Categories Section 1202 of the Internal Revenue Code allows founders and investors to exclude significant gains from the sale of qualified small business stock (QSBS). To qualify, the issuing corporation must meet an active business requirement and cannot be primarily engaged in certain excluded