Properly winding down your business can be as important as starting and running your business. There can be serious tax consequences to dissolution and the importance of planning the termination should not be understated.
Developing a personal exit strategy is often overlooked, but helps to smooth over the transition of dissolving your entity and put money back into your pockets. A tax professional can help you answer the right questions and assist you in planning your business strategy from creation to dissolution.
An exit strategy depends upon your specific goals for your business venture. Items to think about while setting up and dissolving entities include the type of assets held by the business, the flexibility of adding and removing assets, and the effects of changing ownership. Entity types are listed below with a brief description of their tax consequences upon an individual’s exit.
Just as there are no formal requirements to create a sole proprietorship, there are also no formal requirements when you choose to dissolve it. The owner of the business will recognize the entire gain or loss on the sale of the business.
General Partnerships, Limited Partnerships, and Limited Liability Companies
There are many similarities in the dissolution of General Partnerships, Limited Partnerships, and Limited Liability Companies. In order to dissolve these types of entities, the partnership must cease to conduct business and at least fifty percent of the total interest is sold or exchanged within a 12 month period. A gain is recognized on the partner’s return, if the amount of cash received exceeds the basis in the partnership interest. For Limited Liability companies, the company owners must approve the dissolution.
C Corporations and S Corporations
In both C Corporations and S Corporations, the shareholders must approve the dissolution and the board of directors must draft and approve a resolution to dissolve. In an S Corporation, the shareholders recognize the gain or loss at dissolution based on the value of the cash and the property distributed. A C Corporation recognizes a gain or loss at dissolution based on the value of the property received, and the shareholders will recognize the gain or loss on the sale of any property received.
The best exit strategy takes advantage of a good situation, and keeps you out of a bad one. Don’t wait until it’s too late to think about an exit. Contact your L&B professional for more information.