The Internal Revenue Code contains a number of preferential tax treatment provisions for small businesses. One that is often overlooked is Section 1045, which generally permits a non-corporate taxpayer to elect to defer recognizing gain on the sale of qualified small business (QSB) stock held for more than six months to the extent the proceeds are reinvested in other QSB stock during a 60-day period beginning on the date of the sale.

With certain exceptions, QSB stock means any stock acquired on original issuance by the taxpayer from a domestic C corporation after August 10, 1993 that meets the following requirements: (1) the aggregate gross assets of the corporation must not have exceeded $50 million at the time of and immediately after the issuance of the stock; and (2) at least 80% of the value of the corporation's assets must have been used in an active trade or business. IRC Section 1202.

Section 1045 permits founders and angel investors to move money from one business venture to the next without having to pay tax on appreciation in the first business venture. Because the benefit of Section 1045 applies only to stock in C corporations, it should be taken into consideration by entrepreneurs in choosing the form of their business ventures.

If you form as an S corporation, you will not be able to access the benefits of Section 1202 or Section 1045 with respect to your founders' stock.