The sale of your company brings you income, and, as a result, taxes. All things in life are not taxed alike, making it advantageous for you to consider certain conditions before you sell your company. How the government taxes income, the structure of your company, and the terms of the sale are the most important issues you need to review. Because of the intricacies of the tax codes, hiring a knowledgeable tax advisor can be invaluable in this process. Following is an overview of what you will encounter in terms of taxes when selling your business.
The government views the income you receive on the sale of your business in one of two ways: Basically, it is seen as either personal income or capital gains. Personal income is generally taxed 10 percent higher than capital gains, giving capital gains a decidedly greater tax advantage. When selling your company, the structure of the company and the nature of what's being sold determine whether the income is personal or capital gains.
When starting your business, you can structure it in one of several different ways:
- Sole Proprietorships
- Partnerships
- Limited Liability Companies
- Corporations
For more information on the liability and tax implications of each, be sure to read What Type of Business Structure Is Best?
Property sold by sole proprietorships and partnerships is taxed in terms of capital gains, and all other assets, such as inventory, are treated as personal income. C corporations have the advantage of selling both their stocks and assets, but in the case of assets it is taxed twice. S corporations avoid the double tax of assets, but require that corporations meet certain criteria. A corporation must be an S corporation for a certain amount of time prior to the sale for the tax advantages to be completely effective. This deters companies from using the S status as a means of avoiding taxes when selling their business. Accordingly, this is something you should think about when you start your business.
As the seller, you can bargain for terms that give you a better tax advantage. If you accept payments, you can select to be taxed as capital gains at the end of the transaction. Selling the stock of a corporation means that the buyer accepts all the aspects of the company, including any of the liabilities. Because of this, buyers are more apt to want to buy the assets rather than the stocks. When setting the terms of your sale, consult your tax advisor as to the ramifications of everything stipulated in the contract.
Selling your business can be extremely complex, and can require the expertise of professionals such as consultants, accountants, and tax advisors. If you find you don't really want to sell your business, you have the option of reorganizing on a tax-deferred basis. This is one of the decisions you need to make as you draw up the provisions for selling your business.
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