Selling your business: the tax decisions that happen two years before the sale

Most owners sell a business once. The tax on that sale can be the largest single bill of their lives, and most of it is decided long before the buyer shows up. By the time a letter of intent is on the table, many of the best options are gone.

Here’s what we work through with owners two to five years out.

1. Is your entity still the right one?

Whether your business is an S corporation, a partnership, an LLC or a C corporation shapes almost everything about a sale: how the price is taxed, whether a buyer prefers assets or stock, and whether special rules apply. For example, owners of qualifying small business stock in a C corporation may be able to exclude some or all of the gain, depending on when the stock was issued and how long it’s been held. Changing entity type has its own tax cost and waiting periods, which is why this comes first.

2. Asset sale or stock sale?

Buyers usually prefer to buy assets, because they get a higher basis to depreciate. Sellers usually prefer to sell stock, because more of the gain is taxed at capital gains rates. The difference can be large. Knowing its size before negotiating lets you price it: a buyer who wants an asset deal can pay for the privilege.

3. When the money arrives

Taking part of the price over time, through an installment sale or an earn-out, can spread the gain across several tax years and keep more of it out of the top bracket. It also means you carry some risk that the buyer doesn’t pay. We model both sides.

4. What to give before the value is fixed

Shares given to family members or trusts before a sale are valued at what they’re worth when given, often with discounts for lack of control or marketability. Once a deal is agreed, that value is effectively set, and gifts made after a binding agreement can be treated as if you sold first. Gifting has to happen early to work.

5. Where you live on closing day

State income tax on a large gain can be significant, and it depends largely on where you’re resident when the gain is recognized. A move made for tax reasons has to be real and well documented. It can’t be a change of address in the month of the sale.

6. What you’ll do with the proceeds

A sale turns an illiquid business into cash, often with an estimated tax payment due within months. We plan the payment, invest the rest to the income you need, and set up the retirement plan you may not have had time to build while running the company.

The team you’ll need

A sale involves your attorney, a banker or broker, and the buyer’s advisors. We don’t replace any of them. We make sure the deal they negotiate is the one you want after tax, and we prepare the returns that report it.