In some cases, when a business owner wishes to sell their business, they may not be in the best possible position. For example, they may be a C corporation. Because of the double taxation of the C corporation, it does not create an effective tax environment for selling the business. Consequently, positioning to a pass-through entity would be more advantageous. However, that takes time to arrange.
The principal advantage of this flow-through entity structure is that dividends can be paid by the company to the owners without additional tax. In other words, the dividends can be placed into the hand of the owner with having only incurred taxation to the owner, not to the corporation and then the owner.
Under a C corporation, when the corporation distributes dividends (distribution) to the stock holders, the corporation must pay a tax on the corporate side, then the recipient pays tax on that distribution. Dividends are not tax deductible to a corporation, so consequently there is the double tax. Bottom line, double taxes!
When you have an S corporation or LLC the Key employees can receive its share of company dividends free of additional taxation and use the dividend proceeds dollars-for dollars to pay for their stock investments.
It is important that in the future when you consider exiting your business, you start the process of planning with the most effective tax structure for the future. The C Corporation is fine when you are not in exit mode, and there are no dividend distributions.
Timing is important as it takes time to move from a C corporation to another form of pass through structure, such as a LLC or S corp. Early planning will be a benefit.
A change from C Corp to a pass-through company can have tax ramifications, so planning is essential in when to, or if to, make this move.
Tax on Assets:
If you sell an asset of the corporation, it is possible that there is a corporate tax on that sale. However, if you sold an asset of an S corporation, there would not be a corporate tax.
If you are considering changing your business type, we suggest you discuss this strategy with your tax advisor.