Disposing of a Business--Using An ESOP
Since you have indicated that you would like to sell your business and avoid as much tax as possible, we have an interesting idea for your consideration. It might seem a bit complicated, but the results are fantastic, and it has worked for many business owners. Best of all, it's all above board as far as the IRS is concerned.
A special provision in the tax code that is meant to foster employee ownership allows you to sell 30% or more of the stock in your company to an employee stock ownership plan (called an ESOP) without owing any immediate tax on your profit. (You must have held the stock for at least three years.) All you have to do to avoid tax is to reinvest the sale proceeds in the securities of U.S. operating corporations. You can't buy mutual funds, you must buy securities issued by other corporations. However, you can diversify as much as you want. If you're looking for current income, you can buy bonds or dividend paying stock. If you're looking for future appreciation, you can buy growth stock. It's up to you.
You only owe tax when and if you sell the replacement securities. If you hold them for your entire life, neither you nor your heirs will ever owe income tax on them.
How do you go about this? You have to set up an ESOP for your company. An ESOP is actually a qualified plan for the benefit of your employees. Your company makes contributions to the plan, just as it would with any other retirement plan. The difference is that the tax-deductible contributions go toward the purchase of stock from you (or to pay off the tax-advantaged loan that the company or the ESOP may take out to buy the shares).
Of course, there are costs involved. You may have to terminate or modify an existing retirement plan. The ESOP rules are quite complicated, and there will be appraisal costs to ensure that the ESOP is paying a fair price for your shares. But if your investment in your company is relatively small, and its value is greatly appreciated, the combination of tax advantages offered by the ESOP will more than make up for the expenses. Please call for more details if this plan interests you.