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Key Takeaways The business entity you choose has a big impact on your future growth and profitability. It’s not just a matter of checking a box.
The choice matters because there’s a type of entity that has one of the most powerful tax incentives for business owners: Qualified Small Business Stock (QSBS).
With QSBS, you could potentially pay zero federal income tax on millions of dollars of gain from selling your company.
However, QSBS is specifically crafted to be difficult to achieve, and picking the wrong entity from the very beginning could prevent you from ever benefiting from it.
The first thing I’m often asked by many new founders isn’t a tax return question; it’s a business entity question. Should the company be an LLC taxed as partnership, LLC taxed as S-corporation or C-corporation?
Many founders see the business entity question as simply a matter of checking a box. Depending on what entity you selected, it will impact future growth and profitability because one type of entity has one of the most powerful tax incentives for business owners: Qualified Small Business Stock (QSBS).
When I talk about QSBS with new business owners, they get excited. Who wouldn’t get excited about potentially being able to pay zero federal income tax on millions of dollars of gain from selling a company?
Here comes the part that is important: Qualified Small Business Stock is specifically crafted to be difficult to achieve, and picking the wrong entity from the very beginning could prevent you from ever benefiting from QSBS. This is why I tell every founder to think about where the business is going to be in the next two, five and ten years before making any decisions.
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