Find Your
Ideal Structure

Filed within 30 days of a restricted stock grant. Elects to pay tax on the stock's value at grant (usually near zero at founding) rather than at each vesting event. Without it, every vest triggers ordinary income tax at the current fair market value. There is no extension and no exception -- missing the deadline is permanent.

A mandatory independent appraisal that sets the fair market value for stock option strike prices. All stock options must be granted at or above FMV to avoid IRS 409A penalties: immediate income inclusion plus a 20% excise tax on the recipient. Must be completed before your first option grant and refreshed after any material event.

ISOs defer income tax until sale and potentially qualify for long-term capital gains treatment rather than ordinary income. Only available in C corporations and only grantable to employees. Capped at $100K per year vesting at ISO treatment. Require specific holding periods post-exercise. The gold standard compensation tool for hiring technical talent.

Governs tax-free transfer of property (including IP and business assets) to a corporation in exchange for stock, provided the transferors control 80%+ of the corporation immediately after. The standard mechanism for founders converting an LLC to a C-corp before a VC round. Once converted, the IRS generally prohibits reclassification for 60 months. Timing matters -- execute before any financing diligence begins.

The standard path for bootstrapped startups entering institutional fundraising. Execute via state-law statutory conversion or a contribution of LLC assets to a newly formed C-corp under IRC 351. Requires 80%+ control immediately post-transfer. The QSBS 5-year holding period clock starts on conversion date -- not the LLC formation date. Keep your LLC cap table and operating agreement simple before converting; complexity here makes the conversion significantly messier and more expensive.

Start with a single C-corp as your financing entity. Add an operating subsidiary (OpCo) later, only when a concrete need exists -- material operational liability exposure, international expansion, or an acquisition. The parent C-corp retains IP ownership; OpCo employs staff and signs customer contracts. This keeps your investor-facing cap table clean while creating operational ring-fencing underneath it. Requires separate bank accounts, books, and properly documented intercompany agreements to preserve liability separation.

S-corp shares do not qualify as QSBS, and issuing preferred stock to a VC fund would inadvertently terminate the S election anyway -- creating an uncontrolled tax event. Terminate the S election voluntarily before any financing discussion. Founders receive C-corp stock on conversion; this date starts the QSBS clock. The research strongly recommends avoiding S-corp status entirely if institutional capital is anticipated at any point.

Institutional investors -- particularly VC funds -- strongly prefer Delaware corporations due to standardized NVCA financing documents, predictable corporate law, and the Delaware Court of Chancery's specialized jurisprudence on corporate governance disputes. A C-corp formed in any other state can domesticate to Delaware, preserving entity continuity (same EIN, same contracts, same IP ownership) while changing the governing law. Note: even a Delaware entity must separately qualify to do business in any state where it has employees or offices.