If you have decided to sell your business to go to the next level, retire, or simply change your focus, you still need to pay attention to taxes, legal provisions, and other important details.
In this regard, our strong suggestion is to start planning this important move ahead of time. Doing this will offer you a wider perspective on things and will give you some time to plan your next move. This article explains the necessary tax strategies that you should consider when selling a business.
In the case of a sole proprietorship, negotiation is key
In case your company is a sole proprietorship and you are thinking of selling it, you should handle it as if you sold each asset individually. The majority of the assets generate capital gains, which are usually taxed at lower rates. However, when you are selling certain types of assets, like inventory, you can generate ordinary income. It is up to the involved parties to negotiate the selling conditions, which include distributing the purchase price to each of the business's assets.
This allocation is actually the negotiation that is taking place. According to the Asset Acquisition Statement, there are seven asset classes that you have to allocate the price. These classes include checking and cash accounts and going-concern value and goodwill (an intangible asset), among others.
Moreover, in the case of a sole proprietorship, you may also want to think of paying the Capital Gains Tax. This needs to be paid in case you, as a seller, are making a profit after the deal is done. There are some assets that you may have to pay this tax on like shares, lands and buildings, and plant and machinery. Keep in mind that the Capital Gains Tax might also be required if you are selling your business as a partnership.
What about interest in the case of a partnership?
In the case of a partnership, selling an interest is exactly like selling a capital asset. This means that you can either gain or lose. However, you can treat any part of this gain or loss as an ordinary one because it results from inventory items or unrealized receivables. This is the part when you can defer your capital gain thanks to an investment in an Opportunity Zone.
The trick here is to be quick on your feet and act within 180 days. This means that you should reinvest your gains in an Opportunity Zone. It’s important to note, however, that this deferral is limited because all of your gains must be recognized before or by December 31, 2026. If you hold on to your investment after this date, you will have tax-free gains on any future appreciation.
How to Avoid Capital Gains Tax when Selling a Business | Nomad Capitalist
Selling your business for shares
In case you want to sell your business and obtain shares, there are some important tax-related details that you may want to consider. Probably the most important one is the possibility of CGT liability deferral. Besides that, by selling the business for shares you may be eligible for Inheritance Tax relief obtained from the Business Relief. However, it’s important to also mention the possible disadvantages of shares. One of the most important is the possibility of losing the Business Asset Disposal Relief. So, it’s definitely up to you to balance these options and think about what strategy fits your goals the best.
In the case of a corporation sale
If the business you own is a corporation, you will have to choose a strategy when it comes to selling it. You can either begin a sale of assets or simply sell stock. The vast majority of people would much rather sell the stock because it allows them to put a limit on tax reporting to capital gain.
If you go to the other side of the fence, however, a buyer would usually prefer an asset sale. That’s because it’s more favorable when it comes to the assets they’re buying and their depreciation. The best strategy, in this case, would be, once more, negotiation. It may take a bit of back and forth between the seller and the buyer to establish a middle ground and do everything smoothly.
It’s also important to mention the fact that if you want to sell your corporation, you might have to pay a Corporation Tax. This will be applied to the profits that your sold assets will generate. Your gains will need to be established in order for you to see whether or not you are obliged to pay this tax. The next step is to report everything to the HM Revenue and Customs and file your Company Tax Return.
In the case of an LLC sale
If you are thinking of selling your LLC, you should know that the whole procedure is quite difficult. It may be of great help to pick an experienced attorney to advise you and do part of the work. The possible buyer might want to acquire our LLC in full or only buy the assets of your company. Then it’s important to know that you will need a bill of sale to actually sell your LLC membership interests. The situation changes depending on whether or not you have a single-member LLC or if there are multiple people involved. In this case, you will have to discuss with each of them and come to a conclusion in order to know where to go next.
You can also decide to sell an LLC by transferring partial interest. This usually happens when a person does not hold the entire ownership of the business. In this case, you should take a look at your Operating Agreement and follow the sale procedure there. You may also have the original Articles of Organization which could be of great help in case of a sale. Make sure that you thoroughly check those and follow the selling provisions step by step.
It’s also important to mention the fact that the IRS does not actually recognize an LLC as a legal entity. This means that there are no special taxes for LLCs which have been imposed by the IRS. So, if your LLC only consists of yourself, you will be taxed as a sole proprietorship company. If our LLC has multiple members, the selling process will be treated as a partnership. All the profits will be taxed on the income tax returns of each LLC member.
Again, regardless of the situation that you’re involved in, the best idea would be to make sure that your selling process and tax strategies align with your goals. This is why it’s so important to make a plan when deciding what you want to do with your company.
More on the topic: Tax Considerations When Selling a Business
It’s no secret that most owners find it extremely difficult to sell their businesses and move on from them. Some are not sure what they are going to do, especially if they are retiring, while others simply don’t plan ahead. If you are inexperienced or simply don’t want to struggle too much with the whole selling process and the taxes, you can always enlist a professional to help you out. Don’t rush into the selling of a business if you have zero experience or if you are uncertain of your next step!
Eddie Segal is an experienced web analytics specialist and technology writer. In his writing, He covers subjects ranging from finance, cloud computing to agile development to cybersecurity and deep learning. He also specializes in SEO and content strategies for technology brands, and is a project manager at Best Small Business Loans.