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Ownership transition planning. Is your business prepared?


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For the owner of a closely held business, there’s no bigger decision than selling your business. According to the fourth-quarter RSM Middle Market Leadership Council survey, 34 percent of the middle-market executives surveyed received a formal offer for their business in 2015. But, most (88 percent) didn’t sell, saying it “wasn’t the right time.”

When is the right time to sell a business, and what are the key considerations a business owner should keep in mind?

During this 60-minute webcast, RSM professionals share insights on how to best prepare yourself and your company for an ownership transition. We discuss:

  • Today’s buy-sell environment
  • Key trends affecting the middle market
  • Best practices for preparing to evaluate purchase offers 

Below you will find answers to commonly asked questions from the "Ownership transition planning. Is your bussiness prepared?" live webcast:

Q: Could you go over the tax planning strategies and the seven states and 31 states that have less taxes? Specifically regarding saving money on the sale?

A: Under the proper circumstances, you can engage in residency planning to eliminate or reduce state personal income taxes related to the sale of a business. To obtain savings, you must be willing to re-locate your primary state of residency to a low or no tax jurisdiction. However, great care is required in implementing a residency change. The move must be real. There has to be a legitimate change of residency. In general, this will require you to sever most or all of your ties to the prior state of residency, and to avoid future contacts with the state such as the ownership of a residence or extended visits.

It takes time to plan and implement a residency change, and you should consider it well before any sale transaction. From a state tax audit perspective, it’s very difficult to defend a residency change on challenge if you move in December and sell your company in January. More time is needed to separate the events (the move and the sale). Additionally, it takes time to obtain a new home in the state to which you are moving, establish appropriate evidence of your intent to stay in that state indefinitely, and divest yourself of your prior home and ties to your prior state of residency.

In general, residency planning is effective when you are selling an ownership interest in an entity because gain from the sale of such an interest would be sourced solely to your state of residency. However, you need to be careful when selling an ownership interest in a partnership or other flow through entity, as some states have special rules that allow taxation of nonresident sellers. For example, some states provide that the gain from the sale of an interest in a real estate partnership is sourced to the location of the real estate. Additionally, great care should be taken in a tiered entity structure, as sourcing by residence may only be appropriate where you directly sell your interest in the entity, and not when an entity you own sells an interest in a lower tier entity.

Where the sale transaction is an asset sale, residency planning generally would not be effective because sourcing would be determined at the entity level. For example, if you own a partnership or other flow through entity and sell the assets of that entity to a buyer, gain from the sale of the assets would typically be sourced by the flow through entity to the state or states where those assets are located (in the case of real or tangible property) or the state of commercial domicile of the entity (in the case of intangibles), subject to state-to-state variations. Even in these circumstances, there could be some savings involved relating to each states’ treatment of residents and nonresidents; however, any benefit would depend on the circumstances.

In addition to sate personal income tax, changing states of residency can be a winner for someone who has sold their business from an estate tax standpoint, by moving to a ‘no estate tax’ state from a state that has an inheritance or estate tax; results in savings by amount of state estate tax rate or inheritance tax rate. This move can be done after the sale transaction assuming the seller survives for a reasonable period of time following the move to a ‘no estate tax’ state.

I had mentioned that there are approximately seven states without a personal income tax, and on the estate planning side, there are approximately 31 states where there is no inheritance or estate tax. 

Q: How often do you see the personal goodwill concept utilized?

A: I do see personal goodwill used in transactions particularly where services are a key element of the business (insurance, accounting, engineering, etc.). As you might expect, the IRS does not like the personal goodwill concept and has argued and attempted to disallow it in some cases. So, I would just say that there is some risk with the concept, but it is used from time to time when the circumstances warrant it. I have read articles written both supporting the concept and slamming the concept from a conceptual, theoretical tax respect.

The structure of the business sold and the states where it operates can play a role in whether we want to shift some of the sale to personal goodwill.  If we have an S corporation and the state taxes the income, then we like to try to shift some of the proceeds outside of the S corporation to personal goodwill to avoid that extra layer of entity tax. At the same time, you need to consider whether this changes the Net Investment Income (Obamacare) tax. Lots to consider, but yes, we do see it done when the right facts exist.


Event details

Who should attend
Business owners, tax professionals, chief financial officers and controllers.


More information
Email us or call +1 800 274 3978.