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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
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.