How much tax will you owe if you sell your business? •


When a founder sell their company, the valuation gets a lot of attention. But too much emphasis on valuation often leads to too little attention to what shareholders and stakeholders pay in after-sales taxes.

After an exit, some founders may pay 0% tax, while others pay more than 50% of their sales proceeds. Some founders can walk away with as much as twice as much money as other founders at the same selling price – purely because of circumstances and tax planning. Personal tax planning can ultimately impact a founder’s earnings as much as exit-level valuation changes.

How did this happen? The taxes due will ultimately depend on the type of equity, how long it is held, where the shareholder resides, possible future tax rate changes, and tax planning strategies. If you’re thinking about taxes right now, chances are you’re ahead of the game. But determining how much you owe isn’t easy.

In this article, I’ll provide a simplified overview of how founders might think about taxes and a simple way to estimate what they’ll owe in taxes when selling their business. I’ll also discuss advanced tax planning and optimization strategies, state taxation, and future tax risks. Remember, of course, that this is not tax advice. Before making tax decisions, you should consult your CPA or tax advisor.

How shareholders are taxed

When it comes to minimizing capital gains taxes, QSBS (small business qualified stock) can be a game-changer for those who qualify.

Let’s assume you are a founder and own stock or options in a typical corporate-backed C-corp. A number of factors will determine whether you are taxed at short-term capital gains (ordinary income tax rates), long-term capital gains, or qualified small business stocks (QSBS).

It is essential to understand the differences and where to optimize.

Below you will find an overview of the different types of taxes and when they apply. I’ll break this down further to show the combined “all-in” federal + state + city tax, if applicable.

Founders with exits on the horizon that will raise more than $10 million should explore some of the advanced tax strategies I covered in one of my previous articles, as there are opportunities to multiply the $10 million QSBS exclusion or to “stack” and further minimize the load.

Image Credits: Keystone Global Partners

As you can see above, some of the more common levers that affect how much tax a founder owes after an exit include QSBS, trust creation, what state you live in, how long you hold your shares, and whether you exercises options.