Managing your capital: You sold your business, now what?

As a company owner, you may someday be able to sell your company for a significant profit. You’ll be confronted with the hard decision of how to manage what will likely be the largest single influx of income you have had so far.

Entrepreneurs who are exiting their business must revisit and adjust the personal financial strategies that they had in place prior to the sale, such as:

  • Diversify your investments. If you receive capital from the sale, start thinking about how you’re going to invest it. Consider a mix of various investment vehicles like mutual funds, municipal bonds, money market accounts, and real estate investments. The amount of profits, your other assets, and your age will all influence your diversification strategy. Consider employing a professional financial advisor to assist you with the process.
  • Examine your liability insurance. Now is the perfect time to assess your liability risk. And besides, you now have substantial assets that could be pursued. Check to see if you have enough primary and umbrella insurance. Examine whether any other firms you hold expose you to personal financial risk, for example, if you are participating in general partnerships or sole proprietorships, your assets may be at risk if a liquidation, lawsuit, or other unforeseen event is arising. Consider incorporating or forming an LLC instead. If done correctly, incorporation can ensure that the entity, rather not you personally, is liable. 


Minimize your taxes on the sale

One of the major considerations connected with the sale of your business is minimizing taxes. Here are some ways to do this:

  • Structure the transaction in a way that will benefit you. If you receive stocks instead of cash when the company is sold, you should be entitled to receive the shares tax-free if the transaction is properly structured. To guarantee adequate tax treatment, hire a tax lawyer.
  • Seller financing. Many business owners choose to finance a portion of the transaction over a period of a few years, this way, you are essentially deferring the income and it can reduce your taxes. In addition, it is common practice to ask the buyer for a market-level interest rate on that deferred part, so you also make a profit from it. 
  • Make an effort to get capital gains treatment. The tax treatment of capital gains on the sale of shares is substantially better than the tax treatment of regular income. So consult with your tax professional about the types of payments you’ll be receiving as a result of the transaction. You might be able to improve your tax treatment by rearranging the payment. 
  • Allow yourself to lose money on other ventures. Think about selling a losing venture or losing stock before the end of the year to offset some of the advantages of selling your company.
  • Think about tax-free investing. Although the returns are not very high, consider putting some of your income in tax-free government or municipal bonds for at least a percentage of your portfolio if you are seeking a safe, tax-friendly investment. This is especially useful for someone with a large salary.
  • Don’t forget about philanthropic contributions. While you should make donations for charitable reasons rather than tax considerations, you may always donate a few more at the end of the year to reduce your tax bill. 
  • Try gifts. You can contribute up to $15,000 per year tax-free to each individual you choose starting in 2021. (Married couples can contribute up to twice as much by sharing their presents.) According to Internal Revenue Code Section 2501, you may be able to give even more using your lifelong total of $5,430,000.
  • Contribute the maximum amount to your IRA or another retirement plan. This is a legitimate way to reduce your taxes for the year, so be sure you’ve taken advantage of any available IRA or other retirement plan contributions.
  • Pay your state and/or local taxes in advance. If you are reasonably positive that your personal income tax bracket will not rise next year and that you will not be subject to the alternative minimum tax, you can pay state and/or local taxes before the end of the year and deduct them this year.
  • Make an early mortgage payment on January 1st. You can deduct an additional amount for the interest paid if you pay your January 1 mortgage payment on or before December 31. When your lender sends you the 1098 form, remember to add the interest amount to the amount recorded by your lender.
  • Defer income. You may choose to delay earnings until after the first of the year unless you have cause to assume that next year will bring you a bigger income and put you into a higher personal income tax band. Send out your final bills late in December if you’re self-employed, for example, to increase your chances of receiving money in January
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