Tax, Legal, and Estate Planning Considerations in an Exit
Tax fundamentals
Distinguish capital gain from ordinary income, and know the entity's effect: an S corporation stock sale generally produces one level of tax, while a C corporation asset sale can be taxed at the entity and again on distribution. Purchase price allocation among asset classes matters. Other tools: installment sales, IRC Section 1042 (ESOP rollover for C corporation shareholders), Section 1202 qualified small business stock, and Section 1031 exchanges - which apply to real property held for investment, not to operating business goodwill.
Legal architecture
Buy-sell agreements, operating and shareholder agreements, non-competes, employment and consulting agreements, IP assignments, and the transaction documents themselves: representations and warranties, escrows, indemnities, and working capital mechanics. Documents that were never updated can dictate the outcome regardless of the owner's wishes.
Estate planning
Gift and estate exemptions, GRATs, grantor trusts, family limited partnerships, and valuation discounts. Timing is critical: transfer interests before value growth is realized, and recognize that a basis step-up at death may beat a lifetime sale.
Traps
Assuming 1031 covers business assets; ignoring double taxation in a C corporation asset sale; forgetting state and local taxes; overlooking basis and step-up opportunities; and letting the transaction structure be chosen after the letter of intent is signed.
Rule of thumb
Coordinate entity and transaction structure before the LOI sets the frame. Worked example: two identical businesses, one S corporation and one C corporation. The S corporation owner sells stock and pays capital gains once. The C corporation owner sells assets: the corporation pays tax on the gain, and the owner pays tax again on the distribution - a materially lower net result for the same headline price.