Structuring Your Business Sale for Optimal Tax Treatment

The decision to sell a business often focuses on valuation, timing, and finding the right buyer. But behind the scenes, one of the biggest factors in what you keep after the sale is how the deal is structured from a tax perspective.

Too often, sellers focus on the gross number and overlook the mechanics that determine their net proceeds. That oversight can lead to missed opportunities, unnecessary taxes, and permanent loss of wealth.

Here are key strategies that can help you structure your exit in a way that reduces tax drag and supports your long-term financial goals:

Start the Process Years in Advance

The most effective tax strategies require time to implement. Waiting until a letter of intent is signed often limits your options. Ideally, you begin planning one to three years ahead of a sale, or even earlier in some cases.

That lead time allows you to:

• Restructure the business entity if needed

• Separate out real estate or intellectual property

• Create trusts or gifting structures that shift future growth outside your estate

• Install or fund a retirement plan to reduce taxable income in high-earning years

• Evaluate eligibility for tax exclusions such as QSBS (Qualified Small Business Stock)

When your advisors are involved early, they can help shape the deal instead of reacting to terms after they are set.

Evaluate Entity Type and Tax Classification

Your business entity type - whether an LLC, S-corp, C-corp, or partnership - has a direct impact on the tax treatment of the sale. In some cases, it may be worth converting to a different structure years before the sale to unlock tax benefits.

For example:

• Converting to a C-corp and holding shares long enough may allow eligibility for QSBS exclusion

• Certain LLCs may benefit from electing S-corp status to enable more favorable sale treatment

• Pass-through entities may allow for better use of capital gains planning, but can expose you to more immediate tax consequences

Each situation is different. That is why entity review is one of the first steps in pre-sale tax planning.

Be Strategic About Timing and Compensation

Business owners often miss opportunities to smooth taxable income across years. With thoughtful planning, you may be able to:

• Time salary, bonus, or distributions to avoid bunching income

• Pre-fund a defined benefit plan or cash balance plan to reduce your current year’s income

• Push certain payments into a lower-income year after the sale

• Use an installment sale to spread gains over multiple tax years

These techniques help prevent jumping into a higher marginal bracket the year the sale closes, which can cost hundreds of thousands of dollars in added tax if not planned for.

Leverage Charitable Planning Tools

Selling a business can create a once-in-a-lifetime income spike. That also presents a unique opportunity for charitable giving.

Some strategies to consider:

• Donor-Advised Funds (DAFs): Funded with appreciated shares before the sale closes, allowing a deduction at fair market value with no capital gains on the gift

• Charitable Remainder Trusts (CRTs): Used to defer capital gains and provide ongoing income to the seller, with the remainder going to charity

• Private Foundations: For those seeking long-term control and legacy giving

The key is making these decisions before the sale is finalized. Once the sale closes and the shares convert to cash, many tax benefits disappear.

Consider the Use of Installment Sales

If structured properly, an installment sale allows you to receive sale proceeds over time rather than in one lump sum. This can help:

• Reduce the immediate tax burden by spreading gains across multiple years

• Create predictable income after the sale

• Help the buyer finance the purchase when third-party funding is limited

Installment sales do introduce risk. If the buyer defaults, you may not receive the full amount. But for certain deals, this can be a valuable tax and cash flow tool.

Coordinate the Sale With Your Estate Plan

A business sale is also a wealth transfer event. With thoughtful planning, you can pass future appreciation to heirs while reducing your taxable estate.

This might involve:

• Gifting non-voting shares to a trust for children or grandchildren

• Using a GRAT (Grantor Retained Annuity Trust) to shift appreciation outside your estate

• Freezing the value of your estate through entity recapitalization

These strategies are complex and need to be implemented well before a deal is finalized. But when done correctly, they can preserve family wealth for generations.

Work With a Coordinated Deal Team

Accountants, attorneys, financial advisors, insurance specialists - everyone has a role to play. But the most successful outcomes happen when these professionals collaborate on a shared strategy.

We serve as the central planning hub for many of our business owner clients, making sure the right questions are asked, the opportunities are identified early, and the coordination and execution stays aligned with your long-term vision.

Plan Ahead to Avoid Regret Later

The most common feedback we hear from owners after a sale is not that they wish they had received more money. It is that they wish they had planned sooner.

We help owners walk into negotiations with clarity, not just on value, but on structure. That includes how your deal is taxed, how your family is affected, and how to carry your wealth forward into the next chapter.

Any discussion of taxes is for general information purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should consult with their qualified legal, tax, and accounting advisors before implementing any strategy discussed herein. CRN202809-9607356.