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Most owners spend decades building a business and very little time planning how it passes on. Whether the next owner is a family member, a partner, a key employee, or an outside buyer, the tax result of your business succession plan depends heavily on the structure you choose and on how early you start.
In this article
Start with the question: who, and when?
The answer shapes everything else. A sale to an outside buyer, a transfer to children, and a buyout by partners are taxed differently and take different amounts of preparation.
Common exit routes, and what to watch for
Sale to an outside buyer
Usually the cleanest exit, but the price, the allocation of the price among asset types, and whether the deal is a stock or asset sale all change the tax bill. Buyers usually prefer to buy assets, because they get to depreciate them. Sellers usually prefer to sell stock, because the gain is generally taxed as capital gain.
In an asset sale, the price is split among categories such as equipment, inventory, goodwill, and any non-compete agreement, and both sides report the split to the IRS. Goodwill is generally taxed as capital gain, while amounts tied to equipment depreciation or a non-compete can be taxed as ordinary income. That is why allocation deserves attention before a letter of intent is signed.
Sale to partners or key employees
A buy-sell agreement, funded in advance (often with life insurance), sets the price and terms and avoids disputes. How the agreement is structured matters: after the Supreme Court’s 2024 decision in Connelly v. United States, life insurance the company holds to buy back an owner’s shares can increase the value of the business for estate tax purposes. Older agreements are worth reviewing. An installment sale can spread the gain over several years, although depreciation recapture is generally taxed in the year of sale.
Gifts or sales to family
Gifts use part of your lifetime gift and estate exemption, which is $15 million per person in 2026. Each year you can also give up to $19,000 per recipient without using any exemption. Valuation matters: discounts may apply to minority interests, and the valuation must be supportable by a qualified appraisal. New York has no gift tax, but it adds certain gifts made within three years of death back into the estate for New York estate tax.
Keeping the business and passing it on at death
Heirs generally receive a stepped-up tax basis, which can reduce or eliminate income tax on a later sale. The estate, however, may face federal or New York estate tax. New York’s exemption is $7.35 million in 2026, and it has a cliff: an estate worth more than 105% of the exemption loses it entirely and is taxed on its full value. We cover the filings executors handle in our guide to estate and trust tax returns.
Why entity type matters for an exit
An S corporation, C corporation, partnership, or LLC will each change how a sale is taxed. A C corporation that sells its assets can face two layers of tax, once at the company level and again when the money is paid out to owners. On the other hand, C corporation owners may qualify for the qualified small business stock exclusion, which can exclude much or all of the gain on a stock sale if the requirements are met. If the structure is wrong for an exit, it can sometimes be changed, but usually not at the last minute.
Make the business easier to sell
Clean financial statements, documented processes, and a team that does not depend on you alone raise value and shorten the sale. Buyers often commission a quality of earnings review, so issues found early cost far less than issues found during due diligence. Buyers pay more for a business that runs without its owner.
A realistic timeline
Three to five years of lead time gives you room to clean up the financials, restructure if needed, and pick the best moment to sell. Even if you are earlier in the process, a one-hour conversation now is far cheaper than fixing a problem later.
We help owners model different exit paths side by side so the decision is based on what you keep after tax, and we work alongside your attorney and financial advisor.
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Common questions about business succession and taxes
When should I start succession planning?
Ideally three to five years before you expect to sell or step back. That window allows time to restructure, improve financial records, and use gifting strategies.
Is it better to sell assets or stock?
It depends on your entity type and the buyer. Sellers usually prefer a stock sale and buyers an asset sale, so the price and allocation are often negotiated together.
Does New York tax the transfer of a family business?
New York has no gift tax, but a business owned at death counts toward the New York taxable estate, and gifts made within three years of death may be added back.
Talk to Eric about your situation
A short conversation can show where you stand and what to do before the next deadline.
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About the author: Eric Krupnik, CPA, advises owners of closely held and family businesses in Brooklyn and Manhattan on tax planning, sales, and succession. Last reviewed: November 2026.
This article is general information, not tax advice for your specific situation.