Tax Considerations For Business Succession Planning

As a successful business owner, you’ve dedicated years to building your enterprise. The time will eventually come to pass that legacy on to the next generation, a key employee, or an outside buyer. This transition, however, involves far more than a simple handshake. A well-crafted business succession planning strategy is essential, and at its core are critical tax implications that can significantly impact the value you and your successor receive.

At Boswell, PLLC, we guide our clients through this complex process. A poorly structured plan can trigger unexpected and substantial tax liabilities, diminishing the wealth you’ve worked so hard to create. Here are six crucial tax considerations every owner must address. Contact us today.

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The Structure of the Sale (Asset vs. Stock)

This is one of the most fundamental decisions in company succession planning. In an asset sale, the buyer purchases the company’s individual assets (equipment, inventory, client lists). This is often preferred by buyers as it allows them to "step-up" the basis of the assets for future depreciation, creating a tax shield. For the seller, however, this can trigger ordinary income tax rates on certain assets. Conversely, in a stock sale, the buyer purchases the owner's shares directly. This is often simpler and results in capital gains treatment for the seller, but the buyer inherits the company's existing tax basis.

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Gift and Estate Tax Implications

If you plan to transfer your business to family members, the gift and estate tax is a major hurdle. As of 2025, the federal exemption is significant, but careful planning is required to utilize it effectively. Strategies like gifting ownership interests over time in increments below the annual gift tax exclusion can transfer value efficiently. For larger estates, more sophisticated trusts and valuation techniques are necessary to minimize a potentially massive tax bill upon your passing.

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Capital Gains Tax

When you sell your business, the profit you make is subject to capital gains tax. The goal of any good plan is to manage this liability. Structuring the sale as an installment plan, where you receive payments over several years, can spread out the tax impact rather than taking the hit all at once. Proper valuation and careful timing of the sale are essential and important in business succession planning.

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Utilizing an Employee Stock Ownership Plan (ESOP)

An ESOP is a powerful and often overlooked tool for corporate succession planning. This structure allows you to sell your shares to a trust established for your employees. An ESOP can provide significant tax advantages, including the ability for the seller to potentially defer or even eliminate capital gains tax by reinvesting the proceeds into qualified replacement property. It’s a fantastic way to reward your loyal employees while creating a tax-efficient exit.

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The Importance of a Buy-Sell Agreement

For businesses with multiple owners, a buy-sell agreement is a non-negotiable part of succession planning for business owners. This legal document outlines exactly what will happen if an owner retires, becomes disabled, or passes away. From a tax perspective, it should be funded with life insurance to provide liquidity for the buyout. A properly structured, funded agreement ensures a smooth transition and can help lock in a valuation method, providing certainty for tax purposes.

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State-Level Tax Considerations

Finally, never overlook state taxes. While Texas does not have a state income tax, other state-level considerations, such as franchise taxes and property taxes, can still play a role in the transaction. If your business operates in multiple states, the complexity increases significantly, and can play a role in business succession planning.

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Effective business succession planning is a proactive, not reactive, process. Contact Boswell, PLLC in Dallas today to start building a succession plan that protects your future and the future of your company.

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