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Avoiding Excess Tax! On the Sale of Your Business

Small business optimism is at a record high after the recent elections. Owners see opportunity for growth, and reduction in taxes and regulations. See the complete article HERE. It should also be a great time to sell your business. But if you are looking to sell your business, you need to be planning your “Exit Strategy” now.

Most small business owners run their business for years with one thought in mind, “Minimize my taxes and provide the most money to me”. Tending to keep whatever type of entity they started with (Corporation, S Corporation, LLC or Sole Proprietorship), they keep taking every advantage to shelter income from taxes, because they know how to do it for the type of entity they have.

After several years, they decide it is time to sell. If they have not spent time with their professional advisors (CPA, Attorney, Financial Advisor, and Business Intermediary), other than at the end of the year for tax purposes, they may be shocked to learn that there is a big tax liability due.

Exit planning should be done five years before the sale of a company. This rarely happens, but if you take one thing away from this blog, “START doing it Now” if you think you might sell in the next five years.

I want to briefly discuss two items that can cause an unnecessarily large tax bill on the sale of a business. The first deals with tax on the type of company entity. Most small businesses under $5 Million in value will be sold as an “Asset Sale”. There are many reasons for this, mostly dealing with the financial and legal liabilities of a sale of the “Stock or Shares” of the company. If your C Corporation is sold in an asset sale, the tax you pay may be twice what it would be on the sale of an S Corporation or other pass through entity like an LLC. You can, during the exit planning phase, elect to treat your Corporation as a Subchapter S. Here is the kicker, it must be done five years before the sale of your company.  Another area to watch is “Recapture”. When you use accelerated depreciation to minimize taxable income, you may have a big tax bill upon the sale of your company. This can be minimized, but the planning must start long before the sale happens.

At Emerald Coast Business Intermediaries, we believe in working with professional advisors in a team approach to business transfer. You, as a business owner, should also. After all, when you sell a business, it is not only the price, but how much you get to keep.

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