
Ask HN: How do I minimize the taxes from selling my startup? - exitingfounder
I'm about to sell my company.  Because the company has existed for less than 1 year, I'm subject to short-term capital gains tax - about 35%.<p>The tax code stipulates that, if I invest the proceeds in a "qualifying small business" and leave it there for just a few more months, the proceeds of the original and the new investment are treated as long term capital gains - 20%.<p>Even better: if the proceeds stay in a QSB for more than 5 years, the whole thing is tax free, due to this:
http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2010/CorpTax/TaxExclusion_Expanded.jsp<p>I'm fairly certain that there's a win/win/win here: a way I can use my proceeds to invest in a small business, create jobs (the goal of the tax break), make the economy better, but not take on the kind of risk that comes with a traditional tech startup angel investment.  I've thought about buying a diversified portfolio of franchised businesses, for example, or creating a holding company that makes many small investments.<p>But I'm not a financial genius, there's always gotchas, and I don't want to re-invent the wheel.  I've talked to two startup lawyers, a financial planner, and two CPAs, and while they can explain the mechanics, none of them have good suggestions about implementation.<p>Does anyone know of solid strategies for sheltering investment proceeds in a QSB without taking too much capital risk?  This information would be really helpful to anyone here who successfully sells their company!
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patio11
For legal advice, you apparently have money, so talk to the people who trade
money for legal advice.

Are you positive that selling your company is the only mutually beneficial
transaction you and the acquiring party can arrange? There are many possible
options, with VASTLY different tax consequences but only minorly different
changes on the ground. Stock sale != asset sale != IP licensing agreement !=
sudden decision of all key employees to change jobs.

Consider BobSoft, a hypothetical company with three engineers and some IP
which is 100% owned by Bob. If BobSoft gets acquired by Google via Google
buying all the shares from Bob, Bob has capital gains up the wazoo. If on the
other hand Google buys all the assets of BobSoft, BobSoft continues to be a
going concern. It continues paying Bob a salary for a few more months, puts
around doing whatever BobSoft would do in the absence of their main line of
business, hits the magic day on the calendar, and then buys all stock in
itself back from Bob, who now has long-term capital gains. BobSoft then spins
down in an orderly fashion.

Ask your competent legal advisers for how to work this such that you don't
trigger the ire-RS. This is what they do.

More broadly: every tax cutout, no matter how well-intentioned, distorts the
economy by paying smart people to spend more time figuring out how to hit the
algorithm versus doing whatever they would otherwise do to earn money.

~~~
palish
Does this strike anyone else as... well, greedy?

I don't quite mean "greedy" --- I mean dangerous. The OP is about to "win at
life". Why tempt fate?

What I'm saying is, if PG _hadn't_ sold Viaweb _at all_ , then YCombinator
would never have existed. But if he had sold Viaweb for, say, 15% less than he
did... then there's a good chance YC would have been created anyway, because
he would still be wealthy.

So again, why tempt fate? It seems like the best advice is "just get the deal
done".

~~~
nazgulnarsil
you're assuming a 7 figure exit. this might not even be a six figure exit.

~~~
derwiki
which still sounds good for less than a year of work!

~~~
endtime
Less than six figures sounds good for almost a year of building a successful
company? Seriously?

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destraynor
This doesn't necesarily help the poster in this case, but it's worth a read.

Derek Sivers (@sivers) sold CD Baby for $22,000,000. Before he did it he
transferred the entire business to a trust. The trust received the $22 mill in
cash, without paying tax. Derek receives 5% of that amount every year (1 mil)

Read about it here: <http://sivers.org/trust>

~~~
huhtenberg
This is just a tax deferral scheme. It has _some_ benefits, but it is not
dramatically different from paying all taxes upfront.

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dotBen
I'm firmly in the camp of "pay for legal/CPA advice" rather than asking here.

But I've sort of been through this and the short answer is that the time to
consider how you would minimize tax was when you formed the company.

Assigning the stock in the startup to a holding company you control vs
personal ownership, getting into S-Corp vs LLC for the holding company, etc
are all areas you could explore.

It's probably too late now, however.

~~~
benmccann
How would a holding company help? Wouldn't the company just be subject to the
tax then (at the corporate tax rate which would be even higher)?

~~~
dotBen
I believe there are various things you can do _(note IANAL, or accountant)_
such as take procedes taxed as a dividend (lesser tax rate) or even not take
the money out of the company and reinvest or buy an asset and net out zero
taxable profit.

And S-Corp would also come under your personal tax rate, I believe rather than
corporate tax rate.

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maukdaddy
This won't be a popular option, but why not just pay the tax? Why try to
invest or involve yourself in some complicated scheme just to save the 15%. If
the sale is enough money to be somewhat comfortable, pay the tax and be
appreciative of the folks who paid tax before you did - enabling you the
opportunities to easily create and sell businesses.

~~~
exitingfounder
I think I explained the answer to your question in the original post. The
government has decided that in this case the money would be better spent
creating jobs than going in to general funds. I agree. I'm looking for a
mechanism for doing that which accomplishes the stated goal with less risk
than a traditional startup. Win (for me), win (for the government), win (for
society).

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pvsnp
I think you want to ask this to a lawyer/accountant.

~~~
exitingfounder
As I mentioned, I've asked two attorneys (one tax lawyer, one general
counsel), a couple of CPAs, and a financial advisor or two for good measure.
They all could explain the mechanics but none of them had much to suggest
beyond traditional startup angel investments (which I'm going to do with some
of the proceeds - but I need something lower risk for the rest).

~~~
SriniK
Where are you located? If you are in sv, there are quite a few folks who deal
with this kinda stuff on a daily basis. I would definitely take help from
them. Even if the acq is small amount, most of them do help you verbally on a
good faith basis for repeated business from you.

Have you received the LOI yet? <http://en.wikipedia.org/wiki/Letter_of_intent>
Good luck.

~~~
exitingfounder
If you have specific names of advisors who have dealt with this particular
problem, please share them!

The usual suspects (highly regarded startup attorneys, startup CPAs) have been
helpful in analyzing the situation but I haven't found any who has experience
with the problem at hand, and I'd rather not be a pioneer here.

Yes, we've signed an LOI; the transaction is imminent.

------
JonnieCache
_> use my proceeds to invest in a small business, create jobs (the goal of the
tax break), make the economy better_

I was all ready to run up in here hatin' on tax evaders, reel off some polemic
about how schools and roads need to be paid for by everyone, but then I read
this.

Descending cloud of morning depression: averted. Best of luck to you.

~~~
javert
The vast majority of taxes go to far, far less legitimate things than roads
and schools.

The tax system is a very, very crooked one (speaking for the US but probably
everywhere), and nobody should be forced to sacrifice 35% (!!!) of their
earnings to it.

My point here is that you shouldn't go around telling people that they have a
moral duty to pay taxes. People who believe that have to choose between guilt,
and self-sacrifice.

~~~
JonnieCache
There is a moral duty to pay taxes when you live in and benefit from a
civilisation founded upon taxation, public services, and shared wealth.

And self-sacrifice was a pretty good choice last time I checked.

~~~
javert
(a) I'm getting a raw deal; I'm putting into taxes far, far more than I get
back in "benefits."

(b) And, any system that sacrifices some people to others is barbaric, and
ought to be ended.

To elaborate on (b):

The whole point of the rule of law (civilization) is to make it so that nobody
can take what's mine from me by force, which is the very definition of
barbarism (the state of nature).

Yes, we need government force to protect us from arbitrary force (the state of
nature), but it should not go beyond the minimal necessary application of
force. It should not tax me for other people's education, for example. Let
them pay it back once they get jobs. The market works in every sector where
we've tried it.

If I have _any_ duty, it's to oppose continuing such a barbaric system.

~~~
corin_
Society only works if some people pay higher tax than the value they get back,
and some people pay less. If you're lucky enough to find yourself in a
situation where you're having to pay more than average in tax, stop thinking
solely about yourself and by glad that you're helping out people who pay
significantly less than you in tax while living in poverty.

There are plenty of issues with tax systems in most (all?) countries, but the
fact that some people pay in more than they get back from it isn't one of
them.

Your argument of not wanting to be taxed for other people's education... just
doesn't work. What if you had an education and then died, or never worked a
day in your life, who pays for that? The only way that _you_ got an education
is because your parents and their generation were paying for it, and if your
generation aren't paying for the education of those younger than you, no-one
will get educated.

 _"The market works in every sector where we've tried it."_ I'm not sure
anyone who has experienced the health service in many European countries, even
here in the UK where the NHS has many big problems, would consider the market
solution in America to be better than a free health service covered by taxes.
And where do you stop? Should police only investigate crimes for a fee, and
leave anyone who can't afford the prices on their own?

~~~
beagle3
> Your argument of not wanting to be taxed for other people's education...
> just doesn't work.

I'm with you on that, and on the general moral obligation to pay taxes even if
you are in the minority that (supposedly) gets less than they put in with
their taxes.

However:

In the US, the taxes you pay essentially go to government official's cronies
in the banking and military industries and to corrupt unions. Really. The US
now borrows some 20-50% of what it spends (depending on who you ask and how
you count spending on things like medicare, social security, etc)

In the US, you're not actually getting any health services (unless you're
already dirt poor); good education is private in all age groups.

The moral argument is much, much weaker in the US.

And on the angle that I do agree with you -- I think most people who pay 35%
taxes are actually paying much LESS than what they get for -- hiring your own
guards is bound to be more expensive. That's the main service your taxes get
you -- not getting robbed/killed every other day.

------
lubujackson
Don't forget state taxes - if you are an internet-based company and have no
central office, there is really nothing keeping you bound to whatever state
you live in. Look into moving the HQ to a state like Nevada - you can pay
people to be a "registered agent" which means your business mail MUST go to
that person and they'll forward it on to wherever you are.

Consider this "gray hat" tax advice. The tax code isn't built to handle
companies without a true physical presence. They look to see where your main
office is - if you don't have any, you can pretty much claim whatever state
you choose. There may be rules about how long the HQ has to be in a state to
qualify for the tax year, but I think that's it. Certainly ask your
accountant/lawyer for more details and about the letter of the law here.

~~~
rprasad
Two different issues.

The sale of a company is a taxable event to the _owner(s)_ , not the company.
It does not matter where the company is located, it matters where the owner is
located.

That's why Arrington moved to another state while he was in talks to sell
TechCrunch, but left TC in Cali.

Also, the danger with multi-state companies (i.e,. incorporated in one state
but with operations in other states) is that they can subject themselves to
the taxes of each state in which they have a presence. It is settled law that
presence can include facilities _or employees_ even if the business is HQ'd in
another state.

------
triviatise
I have a good tax attorney, contact me if you want contact info. Here is one
possible method. There is a company that will let you buy income insurance
which you can then expense wholly (for the whole amount of the sale of your
company). At some later date when you have additional expenses or take a loss
or with other specific triggers, the insurance company will pay out your
losses. You would typically do this in a year when you take a loss and the
income from the insurance company balances the expenses for that year. They
charge around 5-7%

This is basically a way to smooth out and balance taxes over multiple years.

------
davidw
It'd sure be fun in cases like these to hear more about the company - after
the deal is done, of course.

------
Julianhearn
If you live in the uk you wouldonlypay 10% tax the first time you sell a
company, up to £10m per person.

~~~
benhalllondon
I think it's £1 million.

<http://www.hmrc.gov.uk/cgt/disposal.htm>

~~~
petercooper
Nope, Julian was right the first time. Entrepreneur's relief was increased to
£10m (from £5m) at the last budget: [http://citywire.co.uk/new-model-
adviser/budget-2011-entrepre...](http://citywire.co.uk/new-model-
adviser/budget-2011-entrepreneurs-relief-lifetime-limit-doubled-
to-10m/a481231)

A lot of what's on HMRC's own site is, sadly, stale or poorly dated.

~~~
srgseg
Yes. And it used to be 10% with no limit until 2008. Those were the days.

Also it's not just the "first time you sell a company". It applies on as many
company sales as you want, up to a lifetime total of £10m.

~~~
petercooper
And not even company sales, as far as I understand it, but any group of
complete business assets (that is, any set of business assets that defines a
single "business" - an important point for sole traders like me ;-))

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dfasdsa
Why not just wait until 1 year passes to officially sell your company?

~~~
code
The window of opportunity to sell a company is narrow and if he waits, the
buyer may move on and another one may not come for awhile or offer the same
term. Of course it depends on how far off he is from closing the deal but I
assume OP is asking because its not anywhere near the one year mark.

------
iag
Great question. Would love to hear some of the HN veterans chime in here.

------
rprasad
I've got bad news for you: that tax program expired in January. It was only a
temporary extension to a small business incentive program that ran from
2009-2010. The law still exists, but the tax benefits are significantly
reduced, and it only applies to C Corporations.
([http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_0...](http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001202
----000-.html))

Here are some thoughts (for free, so not in enough detail to act upon without
further legal advice):

\- Hire a _tax_ lawyer. The amount you save in taxes will pay for itself.

\- If feasible, delay the execution of the sale until you have held your
company for more than 1 year.

\- Consider selling your company for stock of the acquiring company instead of
for cash. The transaction would be fully tax free if solely for stock, and
taxable only to the extent of cash/non-stock received. (See IRC 368, and
related sections.)

\- If you made the S election, you must unelect for Small Business Sale
Exclusion to apply. This has fun tax consequences.

And finally, DO NOT HIRE A CPA to do this for you. CPAs know how to add things
up, but they frequently get the law wrong. Tax lawyers exist largely to clean
up the mess created by CPAs.

~~~
exitingfounder
To quickly run through these in order: 1) The program was extended. And
regardless, the original company investment was made during the holiday, so as
long as I roll over within 60 days, I'm OK. 2) I did hire a tax lawyer, which
is why I understand the circumstances pretty thoroughly. What they weren't
able to do was recommend a specific course of action based upon firsthand
experience, which is why I'm asking here - either for someone who has that
experience, or a pointer to a lawyer who's specifically experienced with this
particular cranny of law \- It's not feasible to delay without wrecking the
deal \- A stock transaction is not an option for the acquirer \- We're a C
corp \- I asked a CPA as well since what I'm looking for is experiences and
strategies. I concur with the gist of this advice and will have a tax attorney
look over it if I come up with anything.

Thanks for taking the time to weight in.

~~~
rprasad
Whoops. You're right about the second extension. The law itself (Sec 1202) was
not extended, but other code sections that interplay with 1202 extended (and
expanded) the scope of 1202.

That's what I get for commenting after midnight...

