If you’re looking to sell your business, but you aren’t sure about how the taxes will shake out, here are some helpful tips.
By Bruce Hakutizwi
So you’re ready to move on to the next stage of your career and journey, and you think it’s time to sell your business. Selling a business is a big decision, and an involved process. There’s a lot of work to be done in and around your business to try to make it appealing to buyers; plus, you’ll have to do your due diligence and ensure your tax records are up to date. There are many reasons to sell a business:
- It’s performing poorly: You’re in far greater debt than you’re bringing in, and your liabilities have become more than 200% of your assets.
- Your passion for running the business has faded: If your dream business has become more of a burden than a joy, it may be time to move on.
- You receive an incredible offer: Sometimes buyers will make offers on businesses even if they aren’t for sale. If this happens to you, and it’s a good offer, it might be in your best interest to take it.
- Your business is profitable: It’s easier to sell a profitable business than a failing one, and if you’ve done everything you can with your business and you’re just ready to pass its success on to someone else, go for it!
Business valuation is a broad term applied to numerous methods buyers and sellers can use to place a dollar figure on the total value of the company they are selling. While there’s no right answer to the question “how much is my business worth?” the goal is always to get the most money from the sale of your business you possibly can while still being honest and upfront about your business’s success. This will both help and hurt you when it comes time to pay taxes on the sale of your business, no getting around it.
Business structure and taxes
Depending on how your business is structured, there may be tax implications to selling it before the start of a new year. For some structures, it doesn’t matter when you sell your business, you will have to pay taxes on the sale. However, selling before January 1st means that your business sale will be taxed in the upcoming tax season. If you expect the taxes on the sale of your business to be substantial, it might be best to wait until after the new year to sell. This way, you afford yourself more time to come up with the IRS-coveted tax dollars.
For the most part, the IRS views business sales as the sale of a collection of assets, rather than just one large asset (as it does with a house). Your inventory, your accounts or clients, and any property owned are all part of the sale, but taxed individually.
Here are some ways business sales can be structured, and their tax implications.
Sole proprietorship, partnership, LLC
When you sell a sole proprietorship, partnership, or limited liability corporation (LLC), it is viewed as the sale of a collection of assets, and each of those assets will be viewed and taxed individually. This is when capital gains tax rears its ugly head. While the rate of capital gains tax has been lowered recently, you will still be required to pay it at a rate anywhere from 15 to 28 percent.
The sale of a C corporation is similar to the sale of a sole proprietorship, partnership, or LLC except the sale will also include federal and state income taxes in addition to capital gains taxes. In some cases, when a corporation buys another corporation they may not have to pay taxes at all. However, it’s best to always check with a CPA before making such a decision.
In the sale of a S corporation, business owners may sell either assets or stocks. The simplest way to sell this type of business is through the sale of stocks. However, when this happens the seller will be required to pay capital gains taxes.
So no matter how your business is structured, you should expect to pay at least a small amount in taxes. It’s best to set this money aside at the time of sale rather than spending it elsewhere (though we know it’s tempting!). Doing so will help the tax bill seem less hefty when it finally comes. And, as always, consult your CPA before you sell your business. Doing so will help you get your books in order and will help you understand the upcoming tax implications of selling your business.
Bruce Hakutizwi is the U.S. and International Manager of BusinessesForSale.com, a global online marketplace for buying and selling businesses. With more than 60,000 business listings, it attracts 1.4 million buyers every month. Bruce manages business development, account management, content building, client acquisition and retention in United States of America, Canada, South Africa, and Europe. He frequently writes about entrepreneurship and small business ownership. Connect @BizForSaleUS.