Options Trading Tutorial

Can a sole proprietor sell their business and have the sale proceeds split with an employee /relative?

Mother / daughter business set as a Sole proprietor, easiest tax recording and business set-up. Daughter worked as employee with several others. Agreement was made that company sale would be 50/50 split, as the idea came from daughter and mother was the CEO (sole prop). With sale, substantial amount, they would like it split for each to take care of their own tax liability. Seems like it would be the same as a stock promise / option. No tax until it is sold then it would be 50% (full amount) taxable for each? Anyone have any thoughts?

Public Comments

1. How much money are you talking about? The answer to that may make a difference. Do you have a lawyer involved representing you? You don't necessarily need one, depending on the size and complexity of the transaction. Are you selling assets and/or goodwill? The easiest answer is for the buyer to simply cut one check to each of you for half the total price. Then, you each handle the transaction individually on your own tax returns. It should not be a problem. You may find tax preparers who make this sort of thing much more complicated and expensive for you than it needs to be. They may drag the bogeyman called "assignment of income" out of the basement to scare you. If so, find another tax preparer. However. that might be a true issue, but you have not provided enough information for us to give you an accurate answer. Sometimes, the answer of: It Depends. Really isn't a cop out.
2. At the time of the sale pay the daughter a very large bonus. the problem is that it would be treated as taxable income in the year received. It would be better (from a tax perspective) to convert to either a partnership or an S Corporation and give the daughter her share up front. In that case, assuming the sale was delayed until her profit would be considered a capital gain she would be taxed at the more favorable rate. I suggest that you discuss this with your CPA, determine the difference each approach would make as far as state and federal taxes go and then make a decision. Hope this helps Jerry-the-bookkeeper