Whatever your motivation is for selling your business, you’ll only get one chance to maximize the return on your years of hard work. Do it the right way and you could get the price you want and reduce the impact of capital gains and estate taxes. Do it the wrong way and you might end up with a hefty capital gains tax bill and estate planning headaches.
While buyers may prefer to buy assets, if you’re selling an incorporated business, you generally can get a better tax deal by selling stock. In the case of a business asset sale, you may have to pay taxes twice – a corporate capital gains tax on the sale of the assets (at the same rate as for the corporation’s ordinary income) and an individual income tax on any corporate distributions received by the stockholders. Selling stock, instead, allows you, as a shareholder, to pay federal tax only once, potentially at the more favorable 15 percent or 20 percent capital gains rate. There is no corporate level tax.
Owners of small businesses can get an even better deal. If you sell your business interest as Qualified Small Business Stock (QSBS) and buy other QSBS, you may be able to roll over your gain tax free. (Additional requirements apply.) Alternatively, depending on when you purchased your QSBS, you may exclude up to 100 percent of the gain from your taxable income if you held the stock for more than five years and meet other tax law requirements. The remaining gain is taxed at a maximum rate of 28 percent. In general, gain qualifying for the up to 100 percent exclusion cannot exceed $10 million or 10 times the QSBS’s adjusted tax basis (whichever is greater).
To help maximize your financial return on the sale of your business, consult a financial planning professional before you put your business on the market.