LLC‑to‑C‑Corp Flips for QSBS: A Guide for Founders
- Evin Wick
- Jun 24
- 3 min read
1. Qualified Small Business Stock (QSBS) in Brief
QSBS is a federal incentive under IRC §1202 that lets founders and investors exclude either $10 million of gain or 10× their tax basis (whichever is greater) on the sale of original‑issue C‑corporation stock held five years. The company’s gross assets must stay below $50 million up to and immediately after the equity issuance.
2. What Is an LLC‑to‑C‑Corp “Flip”?
Launch as an LLC taxed as a partnership to pass losses through to members.
Grow until a credible valuation milestone (e.g. $10 million pre‑money term sheet).
Execute a statutory conversion (a “Delaware flip”) so the entity becomes a C‑corporation before closing the priced round.
Each founding member receives C‑corp stock with an FMV basis equal to their share of the business’s value on conversion day—dramatically increasing the 10× QSBS cap.
Example
Two founders own 50 % each when the LLC flips at a $10 million valuation → their new QSBS basis is $5 million each → potential exclusion cap = $50 million apiece.
3. Potential Upside
Benefit | Why it helps |
Expanded exclusion | 10× basis can dwarf the default $10 million cap. |
Early loss pass‑throughs | LLC years let founders deduct R&D losses personally. |
4. Key Requirements & Timing
Original‑issue stock – QSBS applies only to shares issued at conversion; preferred shares issued later do not inherit the founders’ basis.
See also IRS Private Letter Ruling 201436001 clarifying treatment of LLC-to-C-Corp conversions for QSBS eligibility.
5‑year clock – Restarts on the conversion date; gains accruing before the flip are taxable.
$50 million gross‑asset ceiling – Must not be breached right after conversion (new funding counts).
5. Drawbacks & Real‑World Friction
Drawback | Detail |
Legal & accounting cost | Two formation events, statutory conversion, 409A valuation, amended cap table. |
Administrative complexity | K‑1s during LLC phase, updated books, extra diligence at Series A and exit. |
Founder distraction | Time spent on tax structuring instead of product‑market fit. |
Holding‑period reset | Adds 6–18 months to liquidity horizon, depending on when the flip occurs. |
6. Why S Corporations Don’t Work for QSBS
Issue | Impact |
QSBS ineligible | Stock of an S corp is explicitly excluded from §1202 benefits. This is outlined in IRS Notice 2018-26, which discusses QSBS exclusions and limitations. |
Shareholder restrictions | VCs, funds, and even IRAs can’t be S‑corp shareholders. |
One class of stock rule | Prevents issuing preferred shares common in venture rounds. |
Bottom line: An S corp may save payroll taxes for small professional practices, but it is not a viable vehicle for venture‑backed scale or QSBS planning.
7. Decision Checklist for Founders
Question | If “Yes” → | If “No” → |
Can you self‑fund to a meaningful valuation (<$50 m) before VC money? | Consider the flip. | Go C‑corp day 1. |
Comfortable with extra legal fees & K‑1 admin? | Flip might be worth it. | C‑corp simplicity wins. |
Horizon > 5 years after conversion? | Flip viable. | QSBS clock too long; skip. |
8. Conclusion
An LLC‑to‑C‑corporation flip can multiply a founder’s QSBS shield, but only when the expected tax savings outweigh the additional costs, distraction, and holding‑period reset. Founders focused on speed, investor alignment, or exits under ~$15 million per stakeholder typically opt for a clean Delaware C‑corp from day one.
For deeper dives on related structures—like S‑corp payroll savings for solo professionals or using Roth IRAs for minority founder stakes—check our companion guides on the blog.
This article is for informational purposes only and not tax or legal advice.
Evin Wick JD, LLM is a Georgetown-trained tax lawyer and co-founder of S-Works, where he channels two decades of small-business tax expertise into streamlined S-Corp, bookkeeping, and payroll solutions for solo consultants.
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