4 minute read | January.13.2026
As a founder, deciding whether to organize your business as a corporation or a limited liability company (LLC) is a crucial first step. Corporations are often favored for their ability to attract venture capital and offer qualified small business stock (QSBS) benefits, among other factors. Thus, many founders default to the corporate structure from the start. However, in doing so, the founder may be forfeiting some potentially significant tax advantages offered by an LLC (or other entity taxed as a flow-through). The QSBS tax benefits, recently expanded under the “One Big Beautiful Bill Act,” are one example of this.1
The QSBS rules generally allow individual shareholders of a U.S. corporation engaged in a qualifying business to exclude from federal income tax a significant portion of their gain from the sale of their stock (50 percent exclusion for stock held for at least three years, 75 percent exclusion for stock held for at least four years, and 100 percent exclusion for stock held for more than five years). This exclusion applies to gains up to the greater of $15 million (annually adjusted for inflation starting in 2027) or 10 times (10x) the taxpayer’s basis in the stock. For most founders who organize their businesses as corporations from the start and do not make significant capital contributions, this rule would generally cap the amount of such founder’s tax-free gain at $15 million (annually adjusted for inflation starting in 2027), with any additional gain typically taxed at regular capital gain rates.
This is where the use of an LLC can have a significant impact. If a business begins as an LLC rather than a corporation but subsequently converts to corporate status, some interesting QSBS rules come into play. Specifically, for purposes of the 10x‑basis limitation, a founder’s basis in the shares of the corporation received on the conversion is based on the fair market value of the founder’s interest in the business at the time of conversion. In other words, if the fair market value of the founder’s interest in the business is more than $1.5 million at the time of conversion, their QSBS tax benefit limit under the 10x‑basis limitation will be greater than the $15 million limitation which might otherwise apply (such dollar amounts being subject to adjustment for inflation starting in 2027).
Thus, one potential strategy is for a business to start as an LLC rather than a corporation. Once the business has grown in value, the LLC could be converted to a corporation, thereby increasing potential QSBS benefits. Depending on the circumstances, this approach can significantly increase the QSBS 10x‑basis limitation, allowing founders to exclude more gain from taxes upon selling their shares.
Consider this scenario (and, for simplicity, we will ignore inflationary adjustments which may apply starting in 2027):
A founder starts a business as an LLC with an initial investment of $1,000. Over time, the business grows, and the founder’s interest in the business is valued at $20 million. If the founder were to convert the LLC at this point, the founder’s basis for QSBS purposes in the shares of the converted corporation would be $20 million. Therefore, the founder would be eligible to exclude up to $200 million of gain (10 x $20 million) on a subsequent sale of stock, rather than just $15 million (the amount that would have been excluded if the business had started as a corporation).
While this strategy can be highly beneficial, it comes with risks. For one, any “built-in” gain accrued before converting from an LLC to a corporation is not eligible for the QSBS exclusion and will generally be taxed at regular capital gain rates. This means that a founder could instead realize less QSBS benefit in the end if the price at which they sell their shares is not high enough. For example, if the founder in the illustration above receives $30 million of proceeds in an exit transaction, the founder’s tax-free gain would be $10 million under the LLC-to-corporation conversion strategy but $15 million had the founder started the business as a corporation (again, ignoring potential adjustments for inflation). In general, a founder’s interest in the business needs to appreciate by more than $15 million after the LLC-to-corporation conversion for the LLC structure to produce enhanced QSBS benefits.
Additionally, to qualify for QSBS, the fair market value of the entire business (not just the value of the founder’s interest) at conversion must not exceed $75 million (also annually adjusted for inflation beginning in 2027), inclusive of any cash raised from investors as part of such conversion (for example, if the conversion is done in connection with a financing round). It is also important to keep in mind that the three- to five-year holding periods for QSBS start only upon conversion to a corporation.
Finally, founders should note that starting as an LLC and converting to a corporation is likely to result in additional legal and accounting fees as compared to simply beginning as a corporation. Furthermore, the flow-through tax treatment of LLCs may be unfamiliar to equity holders of the business.
Organizing a new business as a corporation from the start is often viewed as the most expedient and cost-efficient structure for founders and their new ventures who plan to raise money from venture capital funds. However, founders should consider the LLC format, at least in the initial stages. Starting as an LLC and converting to a corporation at a later time can offer substantial tax advantages under QSBS rules, but it also requires careful planning and timing and comes with certain risks. It is essential to work closely with tax advisors to navigate these complexities and maximize potential tax savings.
1 The QSBS rules described herein are applicable to stock issued after July 4, 2025; for a summary of rules applicable to stock issued on or prior to such date, see our previous update.