New Jersey Business Brokers: Article About Selling Your Business and Taxes
If you run a Limited Liability Company (LLC) or Sub-S corporation, you may be wondering about tax consequences after you sell. Unlike a traditional C-corporation, business owners who opt for LLC or Sub-S tax status are considered sole proprietors with limited liability. These types of businesses avoid the double taxation that C-corporations have to deal with because the taxes are only taken once from the individual shareholders.
No matter which type of business you run, you always run the risk of being taxed so highly that you walk away with only half of the selling price. The following information will explain business sale tax and how LLC and Sub-S corporations are taxed after a sale. This information isn't intended to replace professional tax advice. Always speak to a certified public accountant before selling your business and discuss tax implications with both your accountant and New Jersey business brokers.
When you sell your business, the taxed amount is the profit from the sale. The IRS uses a tax basis to determine how to tax the sale. Your tax basis is typically the amount you paid minus depreciation and any losses you claim. The profits from the sale plus any additional liabilities the new owner takes over are usually considered the taxable part of a business sale. Many sales put the seller in a higher income bracket temporarily, but you will still be taxed at that income bracket, meaning you can lose a large part of the proceeds to taxes.
In both an S-sub corporation and an LLC, the taxes are pass-through taxes.
The business brokers from Selby Associates of New Jersey would be happy to answer any question you have about corporate exit planning or buying a business.
This means that the income or loss of a business is passed through to each shareholder to be reflected on their personal income tax return. This is how these entities avoid double taxation.
There is no straightforward formula for calculating the taxes you'll need to pay after a sale. How you structure the sale is important for minimizing tax implications, so make sure you speak to your business broker about which type of sale benefits you tax-wise. For example, in a stock sale the selling shareholders pay tax on the capital gain less the tax basis of the stock. In an asset sale, members pay capital gains tax on their share of the profits. Since the tax implications are so overwhelming, make sure you speak with an accountant before making any decisions.
Another to minimize your tax implications is to sell your business through an employee stock ownership plan or ESOP. When you run a small business, most of the net worth is tied up in the company. When it's time to sell, you may realize that the amount you'll get for the company will put you in a much higher tax bracket and cause you to lose a considerable amount of the sale price to taxes. The following information will explain how an ESOP can help you minimize tax implications. The below information is not a substitute for professional tax advice, and you should always speak with a licensed CPA before making any decisions.