This post focuses on a significant tax advantage that any entrepreneur, fundless sponsor and lower-middle-market private equity practitioner should be aware of known as Qualifed Small Business Stock (QSBS). QSBS is an overlooked section of the U.S. tax code that can result in incredible tax savings on capital gains. If a transaction is structured properly, it has the potential to save shareholders millions of dollars in the event of a successful exit (sale of the company).
The attached PDF file provides an explanation of how QSBS works, and details a hypothetical equity structure. The document introduces legal documents relevant in forming a corporation and defining the equity structure of the corporation. The following additional topics are touched on as well:
- The Certificate of Incorporation: The legal document relating to the formation of a corporation.
- Equity Structure: A hypothetical equity structure is introduced requiring two classes of common stock and one class of preferred stock.
- Shares Outstanding: An explanation is provided for the difference between Shares Authorized, Shares Issued and Shares Outstanding.
Download Paper: Fundless Sponsors & Qualified Small Business Stock: An Incredible IRR Boost
Related: Fundless Sponsor Economics
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