For high-growth startups, these tax benefits are often well worth the time and brainpower spent planning and structuring for the requirements imposed by Section 1202 of the Internal Revenue Code. However, to fully take advantage of these benefits, understanding and navigating the 5-year holding period requirement under Section 1202 is essential. In this article, we’ll explore one common scenario that illustrates a key consideration with respect to the holding period from the founder’s and advisor’s perspective.
Founders and startups need to consider Qualified Small Business Stock (QSBS), which offers extensive tax advantages, for their corporate structure. QSBS awards tax benefits to shareholders of companies that meet specific eligibility requirements, including the company being a C-corporation and having assets below $50 million. These benefits mainly include partial or complete exclusions of capital gains from federal income tax. Early planning and knowledgeable advice are crucial for optimization.
Passed by Congress on Jan. 1, 2021, as part of the National Defense Authorization Act of 2021, the Corporate Transparency Act (the CTA) requires certain businesses formed in or registered to do business in the United States to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). The CTA requires reporting companies to report to FinCEN the name, date of birth, current address, and unique identifying number (from an acceptable identification document such as a driver’s license or passport) for each applicant and beneficial owner.
Because a startup investor’s strategy is fundamentally high-risk high-reward, convertible notes look much different than a traditional bank loan to a small business. Therefore, the deal terms of a convertible note offering differ significantly from more traditional forms of debt financing and are more negotiable and less standardized.