Tax reduction tactics when selling your company.(Mergers, IPOs, and Venture Finance: Equities)(Professional standards)

When selling your company, a small investment in professional tax planning can yield substantial benefits. A key goal of minimizing taxes associated with a company sale is structuring the deal so that the majority of the proceeds receive capital gains tax treatment. This usually means selling your shares rather than the company's assets, as the latter can result in a substantially higher tax cost. The worst case scenario is double taxation: once at the company level and again at the shareholder level. In some countries the shareholders can receive credit for tax paid at the company level, reducing the double tax effect. Furthermore, pass-through entities such as partnerships have only one level of tax. However, even in these cases the total tax bill is usually higher since some or all of the assets sold will generate ordinary income rather than capital gains for the company.

There are situations where asset sales do make sense: when there are recoverable accumulated net operating losses, for instance, and a buyer is willing to compensate the seller for an asset sale's added cost. But in most cases, sellers should avoid asset sales.

Sellers should also avoid earnouts that are tied to personal service. In such cases, all or a portion of the earnout may be considered ordinary income to the shareholder. Non-compete agreements are treated in a similar way, so work with your advisors to ensure that you minimize the amount allocated to such an agreement. Note that in Canada non-compete agreements are tax free in some situations, so the reverse is true.

It is also important to determine if you qualify for targeted tax relief programs such as Qualified Small Business Stock in the USA and Taper Relief in the UK, or other benefits such as the lifetime capital gains exclusion in Canada. Furthermore, in many countries there are advantages to gifting shares that have appreciated in value for charitable or inheritance purposes. If either of these situations figure in your plans, investigating your options and preparing to maximize available benefits is time well spent.

Gregory Galliford, vice president, Corum Group, 10500 NE Eighth St., Bellevue, Wash. 98004; 425/455-8281. E-mail: ggalliford@corumgroup.com.

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