I'm interested in understanding how the sale price of a company passes through an LLC and ultimately finds its way to the founders.

Let's say i have a startup which is filed as an LLC, taxed as an s-corp, and there are two founders with 50% shares each. assuming its just the two founders that receive the sale price of 500,000.

How does the taxation work? do the founders each have 250,000 taxed as regular income?

  • 1
    Tax questions require a country tag. United States-based owners? Jan 12 at 17:06
  • S corp does sound like the USA.
    – MSalters
    Jan 12 at 17:32
  • 1
    The sale doesn't pass through the LLC, as you are selling the LLC itself.
    – chepner
    Jan 12 at 19:14
  • How it is taxed depends entirely on the tax jurisdiction in which it is sold. Can you please add a country (and possibly province/state) tag to let us know where in the world you are?
    – yoozer8
    Jan 12 at 19:36
  • 1
    U.S. in regards to selling eihter the LLC itself, or just assets (primarily digital)
    – Jim
    Jan 12 at 20:31

First, are you certain that you are selling the startup itself as opposed to selling the assets of the startup? Often for smaller startups, the assets are sold rather than the startup. In this case you still own the startup, but the startup doesn't have much left.

This makes a big difference:

  • Sales of assets (e.g., IP or software) are often taxed as ordinary income.
  • Sales of startups (the LLC itself) are taxed as capital gains and likely long-term capital gains.

There are many complexities so you'll need to do some research or consult a professional.

  • what would the differences be? between 1) selling the LLC and IP or 2) just selling IP (like digital assets such as software)
    – Jim
    Jan 12 at 20:32
  • This exactly. When I sold my LLC, it was an asset sale, and I was taxed as ordinary income. (I still own the LLC, now as my own consulting business.) When I later bought out my partner's shares, that was a capital gains tax situation for him.
    – Rocky
    Jan 12 at 20:36
  • 2
    Well, among other things: if you sell the LLC, then your statement "how the sale price of a company passes through an LLC" makes no sense because the sale money NEVER PASSES THROUGH THE LLC - you (person) sell the ownership on the LLC, the LLC itself is not getting any money.
    – TomTom
    Jan 12 at 21:17
  • 1
    @Jim, 1) is my second bullet point and 2) is my first bullet point.
    – gaefan
    Jan 12 at 21:18

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