Entity Can Change Form without Losing Qualified Tax Status

A “qualified small business” can issue stock to employees and investors which, if held for more than 5 years, results in a 100% exclusion of gain (i.e., no profits are taxed). A qualified small business is a C corporation that meets certain requirements. However, the IRS has said in a private letter ruling that it can become an LLC, and even change back to a C corporation, without losing its qualified status. A mere change in form or identity (i.e., an “F” tax-free reorganization) does not disqualify the business.