Selling a C Corporation: Tax Liability and Personal Goodwill

A business owner is often shocked when he or she learns the tax implications of selling his or her business if it is a C Corporation. The business owner had known that the C Corporation, as an entity, had its own tax rate. But such a large amount of capital coming into the company at once still creates a lot of sticker shock. And then the owner has to get the money out of the corporation where it is taxed once again.

There is a way to lessen or even eliminate the high tax rate of a C Corporation and avoid the double taxation as well. It is the concept of selling the personal goodwill of the owner of the company. This concept was born in the court cases of Martin Ice Cream Co. v. Comr., 110 T.C. 189, (1998) and Norwalk v. Comr., T.C. 1998-279, (1989) and it is defined as the “asset that generates cash profits of the enterprise that are attributed to the business generating characteristics of the individual, and may include any profits that would be lost if the individual were not present.” So if you are the owner of a C Corporation and can see yourself defined in the previous statement, you just may be able to sell your personal goodwill outside the C Corporation and it be taxed once, as a long term capital gain.

The concept of personal goodwill is valid and will work if the proper procedures and implementations are used. There have been court cases where its use has \ been challenged. The advantage we have is that these challenges to the concept have provided us a road map or a “how to” guide to properly use personal goodwill when selling a C Corporation. Do not be shocked if your CPA, attorney, or even your business broker does not know about the use of personal goodwill, or understand how to properly implement it. It is easy to do some of your own research by looking up the court cases.

If you are concerned about the tax implications of selling your business, call me to discuss how brokers implement personal goodwill and other strategies in the selling process.