Getting Out of Business: Tax Costs and Opportunities in Exiting a Closely Held Business

The primary purpose of this article is to encourage closely held business owners and their lawyers to consider exit costs, opportunities and strategies when making the initial choice-of-entity decision. A secondary purpose is to provide information about tax consequences and exit strategies useful to owners of businesses that are already up and running, whether in drafting a buy-sell agreement or planning for a specific transaction. Therefore, the article begins by comparing the major tax consequences of exiting the alternative entity types available to closely held businesses for tax purposes--C corporations, S corporations and partnerships. Part II of this article provides a brief description of the general tax rules governing dispositions of business interests. It provides a brief overview and starting point for the detailed analysis that follows. Detailed descriptions of the tax consequences of dispositions by Subchapter C shareholders, Subchapter S shareholders and partners follow in Parts III-V. Along the way, strategies are suggested for minimizing tax costs and making the most of tax opportunities when getting out of the alternative entities. Finally, Part VI concludes by examining the significance of differences among the tax costs and opportunities associated with each type of entity in making the initial choice-of-entity decision for a closely held business