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How can the structure of a deal affect the taxes on the transaction?

When should you consider tax implications in the sale of a business?

Legal Entity & Taxation

Posted by David Humphrey on 14 December 2015 | Comments

Legal Entity & Taxation

 “I am proud to be an American and do not mind paying my taxes, but I could be just as proud for half the money.”                             -    Will Rogers

 One of the challenges in the sale of a business is taxes.  The seller often has a considerable gain (which, all in all, is a good problem to have), thus owes a tremendous amount of tax on the sale, reducing the net proceeds of the transaction.  Tax rates can be near 50% between federal and state governments for certain transactions. However, if a deal is structured properly, taxes can be significantly lower.

The type of corporate entity can greatly affect the tax paid: S-Corp. vs C-Corp. vs LLC can play a significant role in the type and amount of tax due upon sale.

The time to consider the tax implications of a sale is during the planning stage, not after an offer has been made.  Buyers have their own tax concerns, which they will factor into an offer price.  They may be willing to negotiate some compromises, but will expect the seller to have done their planning in advance and be ready to engage in a mutually beneficial negotiation.

Owners should meet with their tax advisor well in advance of the sale and have the blunt conversation about taxes.  This is an opportunity to run projections of the tax consequences assuming the business is sold for some targeted amount.  Many times planning for the sale of the business and planning one’s estate can go hand in hand. 

An owner may be able to save significant taxes by gifting stock to family years prior to the sale or gifting/selling certain corporate assets (patents, trade secrets, rights) to themselves or family to avoid C-Corp taxes.  These suggestions, and others your advisors may have, are often complex and should only be undertaken with an advisor who knows their way around the taxation of a business sale.

Quick note: Many owners and their tax advisors desire to sell the stock of the business, rather than the assets of the business, especially if the business is a C-Corp.  Owners should remember that when the buyer buys stock they are buying the entire history of the corporation too.  This includes unregistered business activity, accuracy of prior tax returns and assuming the liability for any errors or aggressive positions taken on those returns.  Owners should take great care to make sure their tax returns and business operations are able to withstand the inevitable buyer scrutiny.

 

If you are interested in learning other ways to increase the value of your business, The Art Of Business Value Enhancement is a Must-Read!  Click here for more information.