H ow you structure the sale of your business has a big impact on your tax bill. To maximize your profit...

Loophole: Sell the stock, not the individual assets. If the business is a regular C corporation, a sale of corporate stock minimizes the taxes you'll pay on the sale.

Reason: Gains on stock held more than one year are taxed at a top rate of only 15%. By contrast, a sale of assets generates a combination of capital gains and ordinary income (including recapture of previously taken tax breaks) with a top tax rate of 35%.

Furthermore, a sale of the assets of the business is taxed twice -- once at the corporate level and again when the proceeds are distributed to company shareholders.

Caution: Buyers prefer purchasing assets because any excess paid is considered goodwill and can be amortized.

In a sale of shares, the premium that is paid for the shares over the value of the company's assets is not deductible.

Loophole: If you must sell the company's assets, keep the corporate entity intact in the form of a personal holding company. Operating as a personal holding company for the proceeds of the sale of the company lets you avoid double taxation. Tax is deferred until the time when the personal holding company is liquidated.

Even better: When a seller still owns a personal holding company at death, no capital gains tax is owed on the liquidation of the corporation.

Caution: This might not be best for younger shareholders. Work out the numbers on the expected annual earnings on the after-tax proceeds from the sale.

Loophole: Elect S corporation status before selling the business. That prevents double taxation of the proceeds. Income from an S corporation is taxed on the individual shareholders' tax returns.

Caution: A business that converts from C corporation to S corporation status must value the business's assets on the date of the conversion. If assets are sold within 10 years, profits realized to the extent of any built-in gains as of that date are taxed as if the company were still a C corporation. The company will pay its own capital gains tax on the built-in gains and distribute the after-tax balance to corporate shareholders in the form of a dividend taxed to them.

Loophole: State in the sales contract that any payment you receive for offering advice to the business's new owners is part of the transition and the covenant not to compete. If such payment is characterized as compensation -- consulting fees, for example -- the payment will be subject to Social Security and Medicaid tax of 15.3%. Payments for covenants not to compete are exempt from those taxes.

Loophole: Factor in tax benefits to the buyer when you calculate your sale price. Buyers typically want to structure acquisitions to gain as many tax write-offs as quickly as possible. Figure in these tax breaks when you value your business...

Goodwill, covenants not to compete, trade names and trademarks, copyrights, and contract acquisitions are amortized over 15 years for tax purposes.

Equipment and software can be depreciated and amortized according to IRS guidelines -- generally over three to seven years.

Loophole: Value your business based on "earnouts." That way, sales proceeds qualify as capital gains and not "compensation" income. Earnouts are sales agreements that call for additional payments, typically over three years after the sale of the business, when certain targets are met. Targets are usually based on profits, but they can also be based on sales or new client growth or employee retention.

Earnouts make sense when the price of a rapidly growing business is based on future increases in profitability.

Loophole: Sell your business in installments. When the business is sold for cash, the seller pays tax on the gain in the year of the sale. With installment sales, the tax is not due until each installment payment is received. The tax is spread over time.

Loophole: Allocate only a small part of the purchase price to equipment. Reason: Depreciation recapture. Certain items are taxed in the year of sale even when payments are deferred in an installment sale. A major item is depreciation recapture. This means you must include in taxable income all or part of the depreciation you've deducted on an asset.

Example: Equipment that cost $400,000 has a book value of $100,000. When you sell the equipment for $300,000, the $200,000 gain is attributable entirely to depreciation recapture and is fully taxable in the year of sale.

What to do: Reduce the tax by allocating as little as possible of the business's purchase price to depreciated assets.

Loophole: Keep the accounts receivable when you sell the business. This reduces taxes in the year of sale. When a buyer acquires the accounts receivable of a cash basis business, the entire amount of the accounts receivable is taxed as income to the seller in the year the business is sold. That's true even if the sale is structured as an installment sale.

When the seller keeps the accounts receivable rather than transferring them to the buyer, taxes are due only as the money in the accounts is collected.

Loophole: Defer tax by selling company stock to an ESOP. When business owners sell at least 30% of their company's stock to an employee stock ownership plan (ESOP), the proceeds are not currently taxable as long as they are invested in stock and securities of US corporations. The tax is deferred until the replacement shares are sold.

Structure the sale so that the third-party buyers acquire their shares from the ESOP.

Loophole: Sell a cash-rich company in two stages. Current stockholders redeem a portion of their stock immediately before, or simultaneously with, the sale of the company to the buyer.

This way, the cash is stripped from the company and received immediately by the seller. All proceeds received in this manner are taxed to the seller at favorable capital gains rates.