I want to sell my company after 1 year and would like to pay long term capital gains tax. Should I go for LLC ro C/S copr?


1

I have read some questions and asked some people. I have not got the answer.
I understand the basic difference between LLC and C/S corp . I am not sure about long term capital gains tax.
Suppose I sell my company after 1 year for 100k.
Since in LLC , it is pass thruogh income , so will I end up paying short trem capital gains tax on 100k ?
If I do C or S corp, will I have to pay 15% long term capital gains tax ?

LLC Incorporation

asked Jul 28 '11 at 22:17
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Skillguru
344 points

1 Answer


2

If you are going to sell your business after a year, then I would think that the pass-through aspect of an LLC or SCorp would be most important. In most cases, although you are thinking that you will sell your business, in fact what you will sell will be some asset or assets that your business owns.

As a buyer, I would not like to buy a corporation because the corporation might have some contingent liability that does not become apparent until after I have acquired it. Also, if I am really interested in the corporation because it has some asset that I want I might be able to depreciate or amortize that asset if I bought it outright but I could not depreciate the stock in the corporation.

So you, as a seller, would find that your buyer really does not want to buy your corporation or LLC, but just the right to use your process or whatever. If your corporation is the owner of this right, then your corporation will have to be the seller.

So your corporation has a gain to pay tax on (at regular corporate rates with a maximum of 39%). Then, not having any further need for your corporation, but only the money inside it, you will have to pay it to yourself. It will be income to you. Another tax. This is what is known as the double taxation on corporate profits. You could pay yourself compensation which you could deduct on the corporate books and wipe out the corporate tax on the gain, but you still will be paying tax at ordinary income rates (top rate 35%). Instead, you could just close the corporation and pocket your profit on what remains after paying the corporate tax. On this you would pay capital gains tax with a maximum rate of 15%.

answered Jul 29 '11 at 02:25
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Jack Rodenhi
607 points
  • Thanks Jack. In this case there might be few employees, patents and an up and running website. Since double taxation would be an issue in corporation, should I go LLC route ? – Skillguru 9 years ago

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LLC Incorporation