With the Build Back Better Act (BBBA) changing the way small businesses are operating and utilizing Qualified Small Business Stock (QSBS) incentives, many stories are being shared describing the reality of what could happen if these proposed amendments are enacted into law.
Several members of our coalition have shared personal accounts of how QSBS has influenced the way they conduct business. One particular startup founder, investor, and advisor illustrated how he has been involved in various roles—both as a founder and investor—that have benefited from QSBS. Many of his PhD classmates opted for “safer” jobs, at companies such as Google, compared to his more risky endeavors investing in small businesses that are often less likely to succeed.
In his role as advisor to a startup company who produces operations software for small and mid-size breweries, the contributor advised the founder to convert the company to a C-Corporation to leverage QSBS tax treatment. The company was in a position to put forth capital to improve efficiencies. Operating as a C-Corporation meant founders would take modest salaries and pour capital into research and development with the plan for future growth. The advisor shared his concern and acknowledged the founders would have likely kept their company as an LLC, if they had known there was a threat the QSBS program would be modified. The founders made their decision based on the information they knew at the time. If they continued as an LLC, they would have paid dividends and not had the ability to scale to the degree of serving thousands of microbrewery customers they had the potential to serve.
Remaining an LLC, they would continue to service the hundred or so customers they currently have, using the same processes they use today, without the ability to utilize shared technology to streamline operations. Innovative products, such as software extensions for wine making and kombucha brewing, would not be introduced. All-in-all, innovation would be lost.
Not only that, but the impact would be felt at the customer-level, as well. The advisor warns higher-priced, worse tasting, and less consistent local beer would be the result of these inefficiencies. Playing it safe as a modest LLC would mean there would be no reason to invest in research and development. When QSBS incentives are not available as an economic tool to founders and investors, the impact would be felt from top to bottom.
If you are an investor, founder or advisor with your own QSBS story, we want to hear from you.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
