The sale of a business is usually a big event in the owner’s life, financially, emotionally, and in other respects…taxes are key to business sales, but who pays them?
Some entrepreneurs build up and sell a dozen or more businesses during their lifetimes, but for most, their one and only business exists as the product of many years of blood, sweat, and tears. Selling the business – whether to family members or others – is something most business owners contemplate at some time during their ownership.
Before you begin the process of selling your business, you should thoroughly explore the tax ramifications, as they can greatly impact your final “take away’ from the deal. In fact, these are questions you may want to consider before forming your business, especially if you hope to one day sell and reap gains from your years of effort.
Consider this example from a recent article in Forbes: if a C-corporation sells its assets for $5 million, with a $2 million basis, the $3 million gain will be taxed to the corporation at up to 35 percent, leaving only about $3.9 million for distribution to shareholders. And don’t forget that when the shareholders receive the distribution, they must pay tax at their individual rates. Of the $3.9 million distributed to them, how much tax they pay depends on their basis in their shares and other variables – but there will be two levels of taxation.
You can learn more about business succession issues and other estate planning issues on our website. While you’re there, be sure to sign up for our free monthly e-newsletter to stay abreast of news as it affects you and your estate.
Reference: Forbes (July 26, 2011) “But Who Pays Tax on Business Sale?”