Corporations provide for long-term capital gains on exit as opposed to ordinary income from operating partnerships. There is essentially a 17% tax exposure that can be avoided if structured correctly. Today the top U.S. tax rate for an individual is 37% for ordinary income and currently 20% for long term-capital gains. Under the Biden Administration, the top individual rate is expected to climb back up to the 39.6%. Typically, VC funds’ exit strategies are to sell the stock and not receive dividends from earnings. Corporations (unlike partnerships) help the taxpayer avoid phantom income. Investors need to pick up their distributive share of income from an operating partnership via Schedule K-1. If the fund is invested in a corporation the investor will only be taxed when the corporation makes distributions, assuming that there are accumulated earnings, or when the investment is sold. A corporation is generally used as a blocker to avoid certain types of unwanted income and to avoid state and local filing obligations for certain investors such as U.S. tax-exempt investors and offshore investors. This will be discussed in more detail in the article. Investment in a C corporation allows IRC Sec. 1202 (Qualified Small Business Stock (“QSBS”)) to kick in. Remember, venture capital funds primarily invest in seed stage or start-up type C corporations and have a three-to-ten year investment horizon. IRC Sec. 1202 allows non-corporate taxpayers to potentially exclude up to 100% of the gain realized from the sale or exchange of QSBS. The lifetime limit on the amount of gain eligible for the exclusion is limited to the greater of 1) ten times the taxpayer's basis in the stock (annual limit) or 2) $10 million gain ($5 million, if married filing separately) from stock in that corporation. This is a per-issuer limitation on eligible gain. In order to qualify for the QSBS exclusion, the small business stock needs to be held for more than five years and must be acquired upon original issuance for cash, for property not including stock, for services, or in certain circumstances by inheritance. The other conditions that must be met include the following:
 
 
 
Further information  <a href=https://financial-equity.com/>financial-equity.com</a>
 
 
 
Entrepreneurs are not required to pay back venture capitalists in the traditional sense of a loan repayment or contractual obligation. Instead, VCs receive a return on their investment through an ownership stake in the company. If the startup is successful and achieves an exit, such as an acquisition or IPO, the VCs will receive a part of the proceeds based on their ownership percentage. If the startup fails, the VCs lose their investment, and the entrepreneurs are not personally liable for repaying the funds.
Series C Funding : At the Series C funding stage, companies have demonstrated a high level of success and already have significant revenue. They seek additional funding to continue expanding, improve their offerings, or prepare for an initial public offering (IPO). These rounds usually involve large venture capital firms, private equity firms, or strategic investors.
$260 billion.
By Cory Mitchell.
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