Tax Consequences of Selling a Business

There are pros and cons associated with the sale of every business. Selling a company has its obvious financial benefits. However, it’s important to keep in mind that your profits will have to be shared with the government. How much of your profits you keep and how the sale is structured is determined by your business entity. An exit strategy should be in order for this process. The experts at Corporate Business Solutions can assist you with the preparation of a solid exit strategy.

There are three different ways that a business is set up – as a partnership/limited liability company (LLC), sole proprietorship or a corporation. The type of business you own plays a major role in the sale process and the government taxes associated with it. CBS consulting services can be utilized to determine how to go about a sale. Tax planning experts from Corporate Business Solutions can also help formulate a successful exit strategy.

Businesses that are structured and sold as a partnership or proprietorship are considered an asset sale. This means that the buyer is only purchasing the company’s assets, not it’s liabilities. In this case, the buyer isn’t purchasing the business in its entirety. Assets in these sales include inventory, receivable, customer lists, fixed assets and goodwill. A consultant from Corporate Business Solutions can perform valuation services before a sale. This can help determine the best offer on the table.

The income you receive from this type of sale is reported on your individual tax return (as the partner or sole proprietor). The way the income is taxed is determined by the allocation of each asset’s purchase price. It’s considered ordinary income for the sale of inventory and covenant not to compete. It’s considered either capital gain, ordinary gain income or Section 1231 when equipment, real estate and goodwill are sold. CBS consulting services can be used to determine how your profits will be taxed.

An installment sale is another option. It’s common for a seller to try and enter into this type of agreement. This is when the buyer agrees to pay the seller the purchase price over a period of years. In this scenario, the seller is able to defer the tax paid for the business sale over the life of the note. It is required for the seller to pay interest on the note, which too is reported as interest income for the seller. An installment sale isn’t beneficial if the tax rates are set to increase or if the individual is expecting to be in a higher income tax bracket in the coming years.

A contingency sale can be entered into when the seller and buyer are unable to agree on the sale price. The price is then set based on future facts, such as earn out and target sales. If the seller has a cap on how much he/she can receive, then the annual profit percentage is based on the max amount the seller is able to receive. Contingency sales can be quite complex, calling for the expertise of tax professionals. Corporate Business Solutions can provide assistance in these matters.

When a corporation or LLC business is sold, it is considered an asset or stock sale. If it’s an asset sale, it will have the same results as mentioned above. The income is split between all of the owners. In a C corporation, an asset sale is similar, but taxes are paid by the corporation, rather than the individual. In this type of sale, it’s common for the profits to be double taxed, so be wary of this.

There’s a lot to go through when determining your exit strategy. It’s important to understand your business structure and how it will effect your business sale.