What is the best retirement plan for a self-employed contractor?

A solo 401(k) or SEP IRA may be worth considering when the owner has no eligible employees. The better option depends on income, desired contributions, administration, and whether employees may be hired.

Can an HVAC company offer a 401(k)?

Yes. An HVAC company may establish a 401(k) for eligible owners and employees. The plan must follow its documents and applicable contribution, testing, disclosure, and filing requirements.

Can a business owner contribute more than employees?

Possibly. Certain 401(k), profit-sharing, and cash balance plan designs may allow different contribution results, but applicable testing and plan rules must be satisfied.

Is a SIMPLE IRA better than a 401(k)?

A SIMPLE IRA may be easier and less expensive to administer. A 401(k) may provide greater flexibility and higher potential contribution opportunities. The better choice depends on the company.

Can a contracting business have both a 401(k) and a cash balance plan?

A business may be able to maintain both plans. This combination can create larger contribution opportunities, but it also increases cost, complexity, and funding responsibilities.

Selling Your Company? Your Entity Choice Determines Your After Tax Payout

Kendall Maccagnan

Sep 17

6 min read

By Kendall Maccagnan, CPA, CFP® and Financial Advisor in Tampa, Florida

When you sell your business, the number on the term sheet is not necessarily the amount you ultimately keep. Taxes can vary significantly depending on how your business is structured and how the sale is negotiated.

Two owners could sell similar businesses for the same price and walk away with different after-tax proceeds. A few factors can make a big difference including:

Is your business a pass-through entity or a C corporation?
Is the buyer purchasing your business assets or your ownership in the company?
If you own a C corporation, could your stock qualify for the §1202 Qualified Small Business Stock exclusion?

Asset Sale vs. Stock Sale: Why the Deal Structure Matters

Most business sales are structured as either an asset sale or a stock sale . In an asset sale, the buyer purchases pieces of the business, such as equipment, customer relationships, contracts, inventory, and goodwill. Buyers often prefer this because they can generally receive favorable tax treatment on the assets they purchase and have more control over which liabilities they take on.

In a stock sale, the buyer purchases ownership of the company itself. Sellers often prefer this structure because it can make for a cleaner exit and may result in more favorable capital gain treatment.

How is each entity is taxed when you sell?

How is an S corporation taxed when you sell?

An S corporation is a pass-through entity, which generally means you avoid the two layers of tax that can arise when a C corporation sells its assets. This can make an S corporation relatively straightforward from an exit planning perspective.

There is one important catch: Was your S corporation previously a C corporation?

If so, selling appreciated assets too soon after converting can trigger an additional corporate level tax. The current recognition period is five years.

In some S corporation sales, there is also a strategy that can help bridge the gap between what the buyer wants and what the seller wants. A Type F reorganization may allow the seller to transfer the business through an equity sale while giving the buyer some of the tax benefits of an asset sale, including a stepped-up basis in the assets.

Bottom line: An S corporation can offer favorable pass-through tax treatment when you sell, but your prior entity history and the way the deal is structured can still have a major impact on the outcome.

What Happens If You Sell an LLC Taxed as a Partnership?

An LLC taxed as a partnership also generally provides a single layer of tax when the business is sold.

One advantage of selling an LLC taxed as a partnership is flexibility. In certain transactions, the buyer may be able to receive a tax basis adjustment in the underlying business assets even though they purchased an ownership interest (membership interest sale) rather than buying every asset individually (asset sale).

For example, if a buyer pays $500,000 for a 50% stake in your LLC, but the company’s internal asset value on paper is low, the IRS normally only lets them claim $100,000 worth of assets. A §754 election bridges that $400,000 gap, letting the buyer "step up" their asset base to match their actual purchase price.

The Buyer wins because it unlocks future depreciation deductions and protects them from inheriting the company's past tax liabilities. The seller wins because offering these future tax savings makes your business more attractive, giving you the leverage to demand a higher purchase price.

One thing to keep in mind for an LLC taxed as a partnership is that there is a "hot asset" rule. What this rule essentially says is that certain assets such as inventory and receivables can cause part of the gain on the sale to be taxed as ordinary income instead of at those favorable capital gains tax rates.

LLCs taxed as partnerships can also offer flexibility for gradual family succession, including the use of Family Limited Partnerships or Family LLCs to transfer ownership interests over time.

Bottom line: An LLC taxed as a partnership can be flexible at exit and may give buyers attractive tax benefits without requiring a full asset sale. But not all of your gain will necessarily receive capital gain treatment, so the details of what the business owns still matter.

How Is a C Corporation Taxed When You Sell, and Why Can §1202 Matter?

A C corporation can face two layers of tax in an asset sale. The corporation may first pay tax on the gain from selling its assets, and shareholders may then owe tax again when the remaining proceeds are distributed. This can make an asset sale significantly less favorable to a C corporation owner than a stock sale.

One major exception is §1202 Qualified Small Business Stock. If you qualify, you can avoid paying capital gains tax on a large portion of your business sale. Recent tax updates have increased these tax-free limits and introduced a flexible, tiered timeline which essentially means the longer you hold the stock, the more tax savings you unlock.

Not every C corporation qualifies. §1202 has requirements related to when and how the stock was acquired, the corporation’s asset level, holding period, and the type of business conducted. Certain service businesses, including accounting, consulting, and financial services, are excluded.

Bottom Line: A C corporation can create double taxation in an asset sale, but §1202 can be a major exception. If your stock qualifies, it may significantly reduce the tax on a future sale, making early planning especially important.

Why Exit Planning Often Should Start Years Before the Sale

The common theme across all three entities is time.

Some tax planning opportunities cannot be created after a buyer has already made an offer. A former C corporation may have a five year waiting period after electing S corporation status before certain built-in gains are no longer exposed to the additional corporate tax. The full §1202 (Qualified Small Business Stock) exclusion can also depend on how long qualifying stock has been held.

Other succession strategies may work better when ownership is transferred gradually over several years.

The Bottom Line: Your Business Entity Can Shape Your Exit

There is no single best entity for selling a business. The right structure depends on how you expect to exit, who may buy the company, and how the transaction may be taxed. A C corporation may offer meaningful benefits when §1202 Qualified Small Business Stock applies, an LLC taxed as a partnership can provide flexibility for ownership transfers and succession planning, and an S corporation can offer pass-through taxation with a relatively straightforward ownership structure.

The bigger risk is choosing an entity when the business is formed and never revisiting whether it still fits your long-term goals. Business exit planning, tax planning, and entity selection are closely connected, and some strategies may require years of lead time.

Next Steps: Feel free to book a consultation to discuss your entity structure and how it may impact a potential sale.

Frequently asked questions

Does an LLC or S corporation pay less tax than a C corporation when you sell a business?

Often, but not always. S corporations and LLCs taxed as partnerships generally provide a single layer of tax when the business is sold, while a C corporation asset sale can create tax at both the corporate and shareholder levels. However, qualifying C corporation stock may receive favorable treatment under §1202, which can materially change the comparison.

What is the §1202 Qualified Small Business Stock exclusion?

Section 1202 may allow eligible owners of Qualified Small Business Stock, or QSBS, to exclude some or all of the gain when qualifying C corporation stock is sold.

What is the difference between an asset sale and a stock sale?

In an asset sale, the buyer purchases specific business assets rather than the entity itself. In a stock sale, the buyer purchases ownership of the corporation. Buyers generally prefer asset sales because they can select the assets and liabilities they assume and receive a stepped-up basis in purchased assets, while sellers often prefer stock sales because the gain is generally treated as long-term capital gain.

Can I change my business entity right before I sell to reduce taxes?

Sometimes, but many exit planning strategies require significant lead time. For example, a C corporation that elects S corporation status generally has a five year built in gains recognition period, while the full §1202 exclusion for newer qualifying stock generally requires a five year holding period. Waiting until a buyer is already at the table can limit the planning opportunities still available.

This content is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. It is not intended as a solicitation or offer to provide advisory services in any jurisdiction where Off the Bay Wealth, LLC is not properly registered or otherwise permitted to operate. Information presented is based on sources believed to be reliable; however, accuracy and completeness are not guaranteed. This material is not intended to be a comprehensive analysis of all topics discussed. IRS provisions are subject to ongoing guidance and regulatory updates. Any financial decisions should be made in consideration of your individual circumstances, including your goals, risk tolerance, and time horizon. Investing involves risk, including the potential loss of principal.