Legal and Tax Considerations in Business Sales

A business sale is one of the most challenging undertakings for entrepreneurs because of their emotional association with the entity. Setting up and running the business is a labour of love for dedicated individuals who aim to change the world. However, they have to part with their prized possession at some point and hang up their boots for retirement.

Although exit planning begins in advance, entrepreneurs often forget to consider the legal and tax implications of selling their businesses. These significant factors can impact the return on investment if not handled carefully. So, here is everything you need to know about legal and tax considerations in business sales. It will help you navigate the process of complying with legal and tax regulations.

Tax Considerations in Business Sales

Entrepreneurs have to pay taxes when they sell business online and receive the payment as a part of their business income. They are liable to pay Capital Gains Tax (CGT), and the tax rate depends on the structure of the business. The tax brackets are based on individual income tax rates if the business is registered as a trust or a sole trader.

For example, if the taxable income from the business sale ranges between $90,001 and $180,000, the tax rate is $20,797 + 37% on every dollar above $90,000, along with a 2% Medicare levy. In case the taxable income is over $180,000, the tax rate is $54.097 + 45% on every dollar above $180,000, along with a 2% Medicare levy.

Conversely, if the business for sale is structured as a company, the tax rate is between 25% and 30%, with capital gains tax concessions. It is vital to hire an accountant to reduce the tax bill by claiming CGT concessions, such as a 15-year ownership exemption, retirement exemption and small business rollover exemption. Other taxes to be paid when you sell business online include GST, which is applicable on a few types of deal structures if the business is registered for GST.

Legal Considerations in Business Sales

When planning to sell the business, the owner has to take the help of an expert lawyer to comply with all the legal obligations. Here is what should be kept in mind.

• Identifying the Business Sale Inclusions

Entrepreneurs have to decide what will be included in the sale, such as intellectual property, brand name, equipment, commercial property or lease, customer database and other assets. It must be discussed, and the cost of the assets can be negotiated.

The outgoing owner will also have to decide if he or she wants to provide training to the buyer for a smoother transition. It requires the current owner to stay in the office after the sale for the training period. They need to mention this in the purchase agreement.

• Providing a Disclosure Document to the Buyer

It is a legal obligation to provide the buyer with a non-disclosure document before signing the purchase agreement. It must contain all the relevant information about the business, such as its financial health, goals, structure, processes, ongoing litigations, customers, suppliers, marketing plan, etc. It helps the buyer to make an informed decision and avoid getting misled through effective due diligence.

• Transfer of Legal Contracts

Entrepreneurs who sell business online have to transfer the lease contract, supplier agreements and employee contracts to the buyer. The transfer of employee entitlements can be challenging because their benefits, such as leaves and incentives, need to be transferred.

If the buyer is not willing to retain the employees because of a genuine reason, they must terminate the contract of the workers before the transfer takes place. The seller must ensure to make the final pay payments correctly within 7 days of the end of their employment.  

• Consider the Structure of the Sale

The seller has to decide whether the business sale structure will be an asset or share sale, or a combination of both. In the assets sale structure, the buyer purchases assets individually instead of buying the business in its entirety. In the share sale structure, the entire business is sold to the buyer along with its assets and liabilities.

• Discuss the Payment Method

The seller must decide on the payment method when selling business online. They can ask for an upfront cash payment or allow the buyer to make deferred payments over a period of time. In the latter, they need to discuss the payment amounts with the buyer and the intervals for making them. In case of deferred payments, the seller must ensure that the payments will be made as promised, or they can lose their returns. Thus, the seller must ask for some security to get the payments on time and avoid disputes.

Wrapping Up

Entrepreneurs preparing to sell business online to find buyers quickly must be aware of the legal and tax implications of the process. They should take the help of lawyers and accountants to understand their obligations and find ways of reducing their tax bills to enjoy a significant return.