What Are Some of the Tax Considerations When Selling a Business?

Jan 14, 2011

No matter where you live or what type of business you are in, there is always wisdom to be gained from speaking with a tax professional – especially when it comes time to sell your business.  Sure, there is plenty of sound advice available on the subject of “tax considerations when selling a business”, the best way to avoid a surprise tax bill is to speak directly with a professional business tax advisor. 

That being said, there are some basic ideas to consider when you structure your sale, since you never know how quickly things will progress with an interested buyer. 

Here are some of the tax considerations when selling a business:

  • If you conduct business through a separate “entity”, as opposed to individually, then this will affect the structure of the sale. 
  • Will you receive the payment for the business in a lump sum or in a series of seller-financed installments?
  • Is any part of the purchase price being allocated to you as compensation for your future consulting work, or as payment for your employment?
  • If the sale is being structured as an “asset sale” then how is the sale price going to be allocated between the various categories of assets? 

When it comes time to pay taxes on the proceeds, the factors outlined above will determine which of the four predominant tax rates will apply to the sale.  These include:

  • Ordinary tax rate
  • Long-term capital gain rate
  • Real estate depreciation recapture rate
  • Corporate income tax rate

Each of these tax rates applies to different types of businesses in different ways, and they can change quite a bit from one year to the next.  To make sure you are taking advantage of all the tax savings for which you are eligible, a tax advisor may advise you to restructure your business accordingly.  For example, to avoid paying both corporate income tax and individual income tax on the sale of your business, it may make sense to transition your business from a C corporation to a Subchapter S corporation prior to the sale.  This is just one of many tax considerations when selling a business, but a tax advisor will give you plenty things to consider.

Finding a buyer for your business may not be as difficult as it seems.  Check out the business listings at BizSale.com, the site where entrepreneurs look first when they want a business for sale by owner.  The site also offers several articles on buying and selling a business, including more information about the tax considerations when selling a business.