Tax Angles to Look for When Selling Business
BERKELEY HEIGHTS, N.J. (TheStreet) -- Small-business owners spend a lifetime building their business. They work countless hours growing it into something of value. When the owners decide to sell, it is critical for them to do some tax planning to maximize their net proceeds. This is even more important for small-business owners when their business is their single biggest asset.
When selling a business, some of the key considerations from a tax perspective are:
|Small-business owners who sell their company need to understand how and when payment streams will be taxed.|
- The sale structure: asset vs. entity sales
- A payment stream: lump sum vs. installment
- A covenant not to compete
- Future compensation
The sale structure is simply a question of what is actually being sold. In an asset sale, the underlying assets are sold to the acquirer. Sales of sole proprietorships or single-member LLCs are always classified as asset sales. In an entity sale the entire business or entity is being sold, which usually includes the underlying liabilities.
The buyer and seller typically have divergent interests in the asset vs. entity sale question. Sellers will prefer to structure the deal as an entity sale, which are considered as a sale of a capital asset -- meaning that as long as the holding period is greater than a year, preferable long-term capital gains rates apply. Buyers will prefer to structure the deal as an asset purchase so they can select the best assets, exclude the liabilities and get a faster recovery via depreciation.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV