All privately held businesses will change ownership at some point, whether it’s to the owner's children, existing employees or a third party. Federal and state tax treatment can vary significantly depending on what the outgoing and incoming owners negotiate. Understanding the impacts of the various taxes on a transfer of ownership can help you plan ahead to come out on top.
If you’re thinking about selling your business, you will need to form a team consisting of your accountant, a banker and a lawyer who specializes in business transitions. One of the goals of this team is to reduce your tax burden from the transition. Here are some practical points concerning taxes that you will want to work through with your team as you plan for the ultimate succession of your business.
Points of Discussion for Your Team
1. Understand the value of the company and what you are likely to receive at closing.
Few privately held businesses change hands for 100% cash, so have an idea of what you will receive in cash vs. what’s at risk after closing, such as a seller note or some form of payment contingent on the future performance of the company. Will this meet your goals? If not, what can you do to close the gap?
2. Determine the impact of transition and income taxes.
There are a host of factors that impact how much money you take home. Asset sales and stock sales are taxed differently, and both depend on the structure that is negotiated between the outgoing and incoming owners, including which assets and liabilities are included in the deal. In addition, work with your accountant to get your working capital in order—this is one of the most misunderstood aspects of a transaction
3. Know your options.
Understand what you can do to minimize tax impacts of a transition (you have some control). Plan well in advance for trusts, estates, gifting and the like.
4. Consider a state and local tax audit.
This will give confidence to a new owner that there aren’t any hidden liabilities, can ensure a smoother transition and can reduce the potential for tax liabilities to you post close.
5. Get your records in order prior to starting a transition.
Talk to your CPA about the level of review you should have for your financial statements. Not all companies have audited financial statements, but consider at least having your statements reviewed each year. This will give a much higher level of confidence to a new owner and, just as important, to their lender.
6. Have a realistic timeframe for a transition process.
It’s a good idea to plan on 1-3 years for a complete transfer of ownership of any kind including pre-transition planning, negotiations, due diligence, legal, lending and owner transition period. It’s never too early to start planning.
7. Consider your real estate options and associated transfer taxes if you own the real estate used by the company.
Keeping the real estate and leasing it back to the new owner may have some tax advantages while providing a steady source of income.
8. Talk about your corporate structure.
If your company is a C-corporation and you have more than a year or two before a transition, talk to your CPA about converting to an S-corporation. This can potentially save you a bundle in taxes from a sale because you will be subject to double taxation if the sale takes the form of an asset sale of a C-corporation.
Get Help Forming Your Team
The hardest part of succession planning is getting the right team in place. Once you have it assembled, you’ll be working with specialists who can steer you in the right direction. If you would like to discuss forming the right team to plan your transition and what that would look like, contact our experts directly.
Plan your transition with an expert.