So you have decided to take the next step and go forward with selling your business, but you are worried about the tax implications that come along with it—and for good reason. When deciding whether or not to sell, many business owners shy away at the uneasy prospect of their postsale tax liability negating their proceeds.
But if you know what you are doing, then you have nothing to worry about. Yes, minimizing your postsale tax liability involves using a few tax strategies, and yes, it does take time (if only it were as easy as hiring a professional moments before you sign). So, If you are serious about selling sometime in the not-so-distant future, then we recommend starting by educating yourself on these tax strategies by speaking to experts you trust—your accountant, broker or tax expert. The sooner you understand the tax implications of the sale, the better.
In the meantime, to help minimize your postsale tax liability here are a few additional tax strategies you can familiarize yourself with before you sign away your company.
Switch to an S Corp
Few things hurt more than paying more tax than you are required. One of the ways to avoid double taxation is by converting your business to an S Corp before the sale. When you convert to an S Corp, there is generally just one tax on shareholders on either asset or stock sale, but the corporation sidesteps paying corporate-level tax. This measure results in significant savings by greatly reducing the total tax liability on sale revenue.
However, it should be noted that if you are thinking about selling your business, this is not one strategy that can wait until the last minute. The conversion to an S Corp must be done 10 years prior to the sale of your business. So plan ahead; talk with an expert and have an appraisal done at the time of the change.
Installment sale
One of the most common tax-deferment strategies for small businesses is an installment sale. During an installment sale, when the buyer purchases either stock or assets they likewise commit to pay a portion of the sale revenue over time. While this does not get you out of your postsale tax obligation scot-free, this arrangement does allow you to declare a prorated portion of your capital gains or taxable sale profits over time, delaying taxes until payments are received and thus lessening your tax burden by spreading it out over time.
ESOP sale
An employee stock ownership plan, or ESOP, sale is another excellent strategy for reducing your tax liability. An ESOP allows ownership to shift to the employees by sale of stock. As long as the ESOP owns at least 30% of the stock, you can defer—or potentially minimize—the resulting capital gains tax. You are required, however, to reinvest the sales proceeds into stocks, bonds or other such securities of U.S. operating companies.
As always, whenever you pursue any significant business undertaking, it is always advisable to seek trustworthy tax and legal counsel. This holds especially true when determining which tax strategy route to take to defer or eliminate the payment of taxes.
If you are thinking about selling your business and would like to speak to a professional, feel free to contact us to schedule an appointment. We look forward to working with you.