How to Sell Your C Corporation for $10M Tax-Free | QSBS Explained

Back in 2019, I sat across from a software founder in the Energy Corridor who was about to sell his tech company for $8.5 million. He had no idea that Section 1202 QSBS treatment could have wiped out $7 million of capital gains taxes if he had structured his company differently five years earlier. He ended up writing a check to the IRS instead of keeping that money.

That’s the story you need to hear. Section 1202 Qualified Small Business Stock is real, it works, and it will save you millions if you set it up right from day one.

What Is Qualified Small Business Stock (QSBS)?

QSBS is a federal tax benefit that lets you exclude capital gains on the sale of C corporation stock. If you hit the requirements, you can walk away from a $10 million sale with zero federal capital gains tax on your profit.

I use this for founders in the Heights, Memorial, the Galleria, and across Houston. The requirement is simple: you have to own the right kind of business, structure it as a C corporation, hold the stock for five years, and keep clean records.

QSBS Fast Facts

• Entity Type: Must be a domestic C corporation
• Stock Origin: Acquired directly from the company
• Holding Period: Minimum five years
• Asset Limit: Less than $50 million in gross assets at issuance
• Business Type: Must be a qualified trade or business

Which Businesses Qualify for QSBS?

The IRS approves manufacturing, tech, distribution, and R&D companies. They reject service businesses, law firms, medical practices, accounting firms, and oil and gas operations.

I see a lot of founders in Houston’s tech corridor asking if they qualify. If you sell a product or manufacture something, you’re probably good. If you sell your time and expertise, you won’t get this benefit.

Eligible Business Types:

• Technology and software development
• Manufacturing and industrial production
• Wholesale and distribution
• Research and development
• E-commerce (product-based)

Ineligible Business Types:

• Health, law, engineering, accounting services
• Consulting and financial services
• Hospitality businesses
• Banking, insurance, leasing, farming
• Oil, gas, mineral extraction

Key requirement: 80% of assets must be working in the business itself, not sitting in cash or passive investments.

The $10 Million Tax-Free Gain Rule

You get the bigger of two numbers: $10 million in gains, or 10 times what you originally invested.

Example 1:

You invested $50,000 into your software company in 2019. You sell it in 2024 for a $900,000 profit. The entire $900,000 is tax-free because it’s under the $10 million cap.

Example 2:

You invested $250,000 and sold for a $3 million gain. You can only exclude $2.5 million (10 times your $250K basis). The remaining $500,000 is taxable.

I worked with a manufacturing owner in the Warehouse District who had three partners. By setting up the equity structure properly, each partner claimed their own $10 million exclusion. That’s a $30 million tax benefit across the three shareholders. One conversation with me five years earlier saved them roughly $8 million in taxes.

5 Critical Requirements to Qualify

Requirement 1: C Corporation Status

You need a C corporation. LLCs, S corps, and sole proprietorships don’t qualify. Period.

Requirement 2: Original Issuance

The stock has to come from the company, not from another shareholder. If you buy shares on the secondary market, QSBS is off the table.

Requirement 3: Active Business Operations

At least 80% of your assets go into running the company. You can’t sit on $2 million in the checking account and claim this.

Requirement 4: Asset Test

Your company can’t have more than $50 million in gross assets when you issue the stock. This includes cash, real estate, equipment, and intellectual property.

Requirement 5: Holding Period

You hold the stock for a minimum of five years. Sell at four years and eleven months, and you lose the entire benefit.

Why Clean Books Are Non-Negotiable

When the IRS audits a QSBS claim, they want documentation you have right now, not something you reconstruct later. I’ve seen founders try to piece together records after the sale and lose the entire benefit because the paperwork didn’t line up.

Required Documentation:

• Capitalization tables and shareholder ledgers
• Financial statements showing gross assets at the time of issuance
• Records demonstrating 80% asset usage in operations
• Entity structure documentation

Mistakes That Blow the Qualification:

• Converting from an LLC or S-Corp without properly issuing new stock
• Failing to track asset values over time
• Selling before the five-year mark
• Operating in an excluded business type

I set up compliance tracking for my QSBS clients. We document everything so when the sale happens, there are no surprises.

When to Start Planning

The best time to set this up is at incorporation. The second-best time is right now, before you raise money or hit the $50 million asset threshold.

I’ve had clients in the Galleria and the Energy Corridor try to retrofit QSBS structures after they’ve been running for three years. It’s nearly impossible once you’ve made certain decisions about entity type and capital structure.

Key Planning Milestones:

• During entity selection (choose C-Corp)
• Before issuing founder or investor shares
• While capital and assets are below $50 million
• Before accepting outside investment

Advantages of the QSBS Strategy

• Tax-Free Exit: Up to $10 million in capital gains per shareholder with zero federal tax
• Investor Appeal: Outside investors get the same benefit, making your company more attractive to buyers
• Stackable Benefit: Spouses, family trusts, and business partners each get their own $10 million exclusion
• Better Valuations: Buyers pay more for a company with clean QSBS compliance because they know they’re getting a tax advantage too

Don’t Miss This

I’ve been doing taxes and business planning in Houston for over a decade. Section 1202 is the single best tax break for business owners. But it only works if you structure the company correctly from day one.

Here’s what I do with my clients:

• Form C corporations with tax planning built in
• Maintain audit-ready books from the start
• Monitor QSBS compliance every year
• Plan the exit so the tax benefit actually happens

If you’re running a product or manufacturing business and you haven’t set this up yet, we need to talk. Schedule a consultation with EZQ Group. The difference between planning now and learning about this after the sale could be $7 million or more.