You put everything into your business, so deciding to sell can be an emotional process. It can also be extremely stressful, especially as you plan ways to maximize the sale’s payoff.

Taxes are one of the biggest factors determining how much money goes back into your pocket. Luckily, there are strategies you can follow to minimize (or at least defer) the taxes on your gains.

Key Factors to Consider

Business Structure

The taxes you owe from the sale of your business will hinge on your business structure, the most common of which include:

Limited Liability Companies (LLCs): When selling a single-member LLC, the LLC is treated like a sale of assets. The owner receives the proceeds from the sale, which are taxed as personal income.

Partnerships: The sale of a partnership interest is also handled like the sale of a capital asset. The business itself doesn’t pay taxes. Instead, the partners each realize a capital gain or loss.

S Corporation: S corporations are “pass-through” entities, meaning shareholders usually report corporate income as ordinary income. However, after a sale, proceeds are reported as capital gains.

C Corporation: During an asset sale, C corporations face double taxation. First, the corporation is taxed on the gain from the sale of assets. Then, individual shareholders are taxed when the net proceeds are distributed.

Asset vs Stock Sales

S corporations and C corporations can choose to carry out an asset sale or a stock sale. However, this decision is often more critical for C corporations from a tax standpoint.

In an asset sale, the seller keeps the legal entity and sells individual business assets. This can include tangible assets, like equipment and inventory, or intangible assets, such as goodwill and trade secrets. Buyers often prefer this method, because they can immediately begin depreciating the assets, but asset sales can hike up taxes for sellers. Tangible assets may be subject to higher than ordinary income tax rates and, if the entity is a C corporation, sellers are subject to two levels of taxes.

During a stock sale, the corporation’s shareholders sell the company’s stock. One benefit of these sales is they are relatively simple. They don’t require lengthy evaluations and retitling of individual assets. The sellers can simply hand off the legal entity and any of its assets and liabilities. Sellers usually prefer stock sales because they only need to pay the capital gains tax rate on the proceeds and can forego corporate-level taxes.

Reduce Your Tax Liability With These Strategies

Negotiate, negotiate, negotiate

If your business is an LLC or sole proprietorship, every asset is treated separately. While some assets, such as inventory, are not eligible for capital gains treatment, many assets are. For preferential tax treatment, you’ll likely want to allocate most (if not all) of the purchase price to eligible assets. However, this wouldn’t be ideal for the buyer, so it’s important to negotiate your allocations to reach a favorable position.

Sell to employees

If you own a C corporation, it’s possible to minimize your taxes by selling to an employee through an employee stock ownership plan (ESOP). This comes with a number of advantages. First, you don’t need to spend time searching for a buyer, and once you make the sale, the cash can be rolled over into an investment portfolio to defer capital gains tax.

Consider an Opportunity Zone reinvestment

The IRS allows business owners to reinvest capital gains from the sale of their business into Opportunity Zones and, as a result, defer capital gains tax. There are a few caveats, however. You must reinvest capital gains within 180 days of the sale, and they can only be reinvested until December 31, 2026.

Use an Installment Sale

Let’s say you sell your LLC for a $100,000 profit. This $100,000 is added to your taxable income, which means when it’s time to file tax returns, your tax rate will be much higher. To minimize the taxes you owe, one option is to use an installment sale, which essentially means offering the buyer an installment plan. However, there are some risks to keep in mind. The buyer, for example, may default, which could result in needing to foreclose on the business.

How Do These Strategies Apply to Your Business?

Do you have questions about the tax implications of selling your business? Are you looking for tailored tax strategies? Our qualified tax planners are here to help. Reach out today and get the personal tax services you need.