Finding Investors Has Just Gotten Easier - Get Your Business Plan In Order

Is yours a "qualified small business"?
Are you actually conducting business?
Does your stock appeal to individuals, rather than to corporations?
Is your company a "C" corporation, rather than an LLC or subchapter S?

If you can answer "Yes", then you are very attractive to thousands of individual investors.

This is huge! There is a largely-overlooked provision in the economic stimulus law that lowers capital gain taxes for individuals who invest in “qualified small business” (QSB) stock.

And now it looks like that tax break could grow from merely good to downright golden under an Obama proposal just issued. Obama aims to completely eliminate capital gains taxes on qualified small business stock held at least five years. Yes, that’s right. Zero. It’s a game-changing shift.

Startups are already salivating at the prospect of putting together stock deals where individuals (but not corporations) who invest — owners, employees, angels, etc. — can exit and pay no capital gain taxes.

What has already been passed: Under new stimulus law provisions, individuals who buy stock in a small business from now through 2010 get a real break on capital gains taxes later on. If the stock is held at least five years, 75 percent of any gain can be excluded — up from the previous 50 percent. The stock must be original issue stock held by a non-corporate investor in a C corporation with gross assets under $50 million. The company must also be actively engaged in a trade or business.

What is being further proposed: The Obama Administration’s budget proposal just issued provides for a complete capital gains tax exemption for qualified small business stock issued since February 17, 2009 and held five years. What’s more, the gains would not count toward calculating the alternative minimum tax (AMT).

Who qualifies: This tax break only applies to individuals who invest in a U.S.-based qualified small business C-corporation with less than $50 million in assets. S-corporation stock does NOT qualify, even if the business later switches to a C-corp. The biggest drawback is that many types of professional businesses are out. The basic rule is this: The company does not qualify if its principal asset is the reputation or skill of one or more employees, such as a doctor, lawyer or accountant. That rules out service firms in health care, law, accounting, architecture and consulting, among others. But most Internet, tech, retail and manufacturing businesses would qualify.

The impact on your business plan:

1. Make sure your potential investors know that this is happening. Many people don't know it yet, and it is up to you to provide the documentation for it.

2. Specifically point out in your business plan how your business is qualified under these new provisions, item by item.

3. Make certain you are approaching "qualified investors", those whose net worth and/or personal knowledge makes them qualified to invest in your company.

4. Don't try to grow too quickly over the five year period, or your investors may lose their entire tax advantage.

If you do opt for this route, be sure to check with a corporate attorney who can keep you apprised of any changes to the law as they occur. He should also do a check up once in a while to ensure that you are compliant with the terms of the law. The cost for the attorney will be minimal when compared to the huge benefit you will receive in the stock offering.