The process of selling a business is rife with complexities. Some of these complexities are legal in nature, such as how best to structure the sale.
How the sale of your business isn’t only a legal matter. There are also a number of possible tax consequences from the sale of the business that sellers need to be aware of.
One of the seller’s goals is to structure the sale in a way that limits the amount of capital gains taxes that will need to be paid. Structuring the sale of your business wisely can help you avoid paying unnecessary taxes, thereby keeping more of the money from the sale in your pocket.
When considering how to sell your business, you’ll want to factor in how your tax liability may be affected.
- Receive proceeds all at once: This is the simplest way to structure the sale of your business. Its simplicity can be both a blessing and a curse. You may have a quicker, easier transaction, but you’ll also have limited options for managing the gains you’ll receive from the sale. If you receive the entirety of your proceeds when you close, all of those capital gains will be received during a single tax year. This can lead to a large increase in your taxable income in the year that the sale is finalized.
- Create an installment sale: Rather than receiving the proceeds during the course of a single year, you can instead set up an installment plan with the buyer. By spacing the sale over multiple years, you may be able to limit the amount of taxes owed by avoiding moving into the 20% federal capital gains tax bracket.
- Consider an ESOP: Depending on the structure of your business and who the buyer is, an Employee Stock Ownership Plan (ESOP) can be a good way to structure the sale of your business. This is a more complicated method of selling your business, but it can allow you to remain involved in the business while still being able to cash out of the business.
Capital gains taxes are unfortunate side effect of selling your business. While you may not be able to avoid taxes altogether, proper planning during the selling process can help limit how much in taxes you may have to pay.