Tax Ramifications Involved in Business Sales, Part 1

There are several important factors to keep in mind during the course of a business sale, and one vital element is the tax ramifications involved. Business sales, like other sales that earn you money, are considered income – this means they are applicable to basic tax laws and requirements, and failure to adhere to these could result in significant issues.

At Utah Business Consultants, our quality business brokers are here to help with taxes and numerous other areas as you work on selling your business. While the taxes involved with a given sale will depend on several complex factors, each of which our brokers will go over with you in detail, there are several broad elements that determine the taxes you’ll be required to pay on a given sale. This two-part blog series will go over everything you need to know about this area.

Business Sale and Tax Basics

As we noted above, the IRS treats a business sale like any other type of sale that nets the seller money. This is income, and like other forms of income, it can and will be taxed.

In the majority of cases involving business sales, the income the seller receives will be classified as what’s known as a capital gain. This refers to the rise in value of a capital asset, which is either an investment or real estate, leading to a higher worth than the original purchase price. Capital gains come with several specific tax ramifications, which also depend in part on some of the other factors we’ll discuss in this series.

Company Type

The first major point to consider is the type of company your business has been operating as. There are a few broad business types out there where taxes are concerned, including the following:

• Limited Liability Company (LLC): When sold for a profit, these sums will generally only be taxed one time as a capital gain.
• C Corporation: Sellers usually taxed twice – one for corporate tax, one for individual shareholders.
• S corporations: Only individual shareholders are taxed, not the corporation.
• Sole Proprietorship or Partnership: Our pros will explain basic tax ramifications for these business types.

Stock Vs. Asset Sale

Another major consideration is whether you’re selling stock or assets. Selling stock in a company means selling partial ownership in it, along with a percentage of debts and liabilities attached to the company – but the tax rate will be far lower for these sales than for those that involve selling capital assets.

Now, buyers tend to prefer assets of a company, because they come with less liability and greater value. For this reason, sellers may sometimes lower their purchase price to make the offer more appealing.

For more on the tax ramifications of selling a business, or to learn about any of our exit planning or business valuation services, speak to the staff at Utah Business Consultants today.