Private ownership of a business and the associated business property is a basic principle of the American free enterprise system. Whether you have a family-owned business or you are the chief executive officer of a corporation, the ability to buy and sell your business is very important to its continued operation. Transferring the ownership of your business may be through a direct cash sale, owner-financing agreement, lease-purchase agreement or the transfer to a family member.
Cash or Financing
During an outright sale of your business, the buyer may write a check from his personal resources or provide the money through bank financing. Either way, Internal Revenue Service regulations require you to consider each business asset as an individual sale. Buyer and seller must use a process called the residual method to determine the distribution of funds across each asset. This residual method determines whether each asset sells at a profit or loss, with the profit taxed as a capital gain.
Owner financing provides a viable path to purchase a business with a proven record of success. Many aspects of owner financing for businesses are the same as for a home. Owner financing provides the opportunity to purchase a business with less money down, friendlier payment options and owner assistance. Under an owner-financing agreement, the seller agrees to carry the payments until the full purchase price is paid. The drawback for the seller is the possibility of buyer default, forcing repossession of the business. A sale using bank financing means the bank carries the risk.
Business leasing options provide an opportunity to take over a business for a limited period, allowing you to find out if you really want the business without all the risk of making an ill-advised purchase. A business lease is similar to the lease of an automobile or any other equipment. At the end of the lease, you can walk away from the business, make an owner-financing deal, qualify for bank financing or purchase the business outright.
Family Member Transfer
If you are able to make the transfer of your business over time, you can systematically do so in segments valued at $14,000 or less and complete the the transfer with no gift tax liability. If your business transfers at your death, assets at or below $5,340,000 (as of publication) are not subject to federal estate taxes. Additionally, at publication, Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania impose inheritance taxes. If you sell your business outright to a relative rather than transferring it as a gift or as part of an estate, normal capital gain taxes apply.
- Small Business Administration: Getting Out
- Internal Revenue Service: Sale of a Business
- Dun & Bradstreet Credibility Corp: Pros and Cons of Equity and Debt Financing
- Regions Financial Corporation: Transferring Your Business
- Internal Revenue Service: Frequently Asked Questions on Gift Taxes
- Internal Revenue Service: Estate Tax
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