When a business owner sells their business how are they taxed?

by a searcher from The University of Michigan - Stephen M. Ross School of Business

2 years ago

I'm sure my question has a very long answer with a lot of nuance. What I'm trying to generally understand is how small business owners are taxed on the sale of their companies, especially those that are pass-throughs (LLCs, S-Corps). In other words, is the sale of a business subject to income tax, capital gains tax, both, neither, etc.? 

Part of why I'm asking is to better understand how some proposed tax code changes will affect business owners pursuing a sale.

1 like
145 views
4 comments

searcher from University of Oxford

If the seller is structured as a C corp it is possible for them to pay zero taxes as a Qualified Small Business Stock sale. They have to have held the stock for 5 years and it must be a small business worth less than $50 million.
https://www.exitstrategiesgroup.com/sell-business-tax-free-1202

2 years ago | like reply | 2 likes

searcher from University of Texas at Austin

It will mostly be capital gains based on the book value of the assets sold (or carrying value of the stock). There are ways to mix it out over a couple of years so the tax impact isn't all at once - seller note, consulting/employment agreement post close. But the majority of the tax impact will be in the year of the sale.

2 years ago | like reply | 1 like

More on Searchfunder

Just Closed on My First Deal! Reflections and Takeaways for other Searchers

45,152 transactions are available on Searchfunder (now searchable by keyword)

Now everyone has unlimited IBISWorld access

Family office looking for traditional searchers

Examples of self-funded searcher websites

Investor seeking Self-Funded Search Deals

What are market terms for Seller Notes?

2 Best Ways To Find Motivated Sellers, Off-Market Deals

Searchfunder is an online community and toolkit for searchfunds. Over 80% of those involved in searchfunds maintain a Searchfunder.com account to help them network, problem solve challenges, and keep up with the industry.

We maintain partnerships with database providers that make searching more effective, efficient and affordable along with features that help searchers find deals and investors and vice versa.