Tax Implications of Selling Your LLC in 2025

Selling your LLC in 2025 could result in a significant payday—but it also comes with important tax consequences. Whether you’re selling to a competitor, an investor, or an employee, the way the deal is structured and how your LLC is taxed will directly impact how much you keep after taxes.

Legal GPS Pro

Protect your business with our complete legal subscription service, designed by top startup attorneys.

• ✅ Complete Legal Toolkit
• ✅ 100+ Editable Contracts
• ✅ Affordable Legal Guidance
• ✅ Custom Legal Status Report

Learn more

In this guide, we’ll walk through the key tax rules that apply in 2025, explain how your LLC’s setup affects the sale, and offer strategies to minimize your tax burden before closing the deal.

1. How Your LLC’s Tax Structure Affects the Sale

The IRS doesn’t view all LLCs the same. Even though your company is legally an LLC, the way it’s taxed determines how your gains from the sale will be reported.

Here’s how it breaks down:

Single-Member LLC (Disregarded Entity)

If you’re the sole owner and haven’t made any special tax elections, the IRS treats your LLC as a disregarded entity. That means the business’s income flows directly to your personal tax return (Form 1040, Schedule C). When you sell the LLC, the IRS views it as you selling individual assets, not shares in a company.

Tax implication: You’ll be taxed on the gain from each individual asset sold (e.g., goodwill, equipment, contracts), which may be taxed at capital gains rates or ordinary income rates, depending on how each asset is classified.

Multi-Member LLC (Partnership)

If your LLC has multiple owners and hasn’t elected corporate taxation, it’s taxed as a partnership. Each partner receives a share of the gain on their personal tax return, based on their ownership percentage. Like single-member LLCs, the IRS treats the sale as an asset sale unless you sell your partnership interest.

Tax implication: You may be taxed on both capital gains and ordinary income, depending on how the purchase price is allocated and how much depreciation you’ve taken on assets.

LLC Taxed as an S Corp or C Corp

If your LLC elected to be taxed as a C Corporation or S Corporation, the rules are different:

• S Corps pass gains through to shareholders, but avoid double taxation.
• C Corps face potential double taxation—once at the corporate level, and again when proceeds are distributed to the owner.

Tax implication: You’ll generally want to avoid selling assets directly from a C Corp because of the double tax hit. Selling stock or membership interest is often more favorable in these cases.

2. Asset Sale vs. Equity Sale: What’s the Difference?

One of the most important decisions in selling your LLC is whether the deal will be structured as an asset sale or an equity sale (also called a membership interest sale). The tax implications of these two structures are very different—and knowing how they work can help you negotiate a deal that leaves more in your pocket.

Asset Sale: The Most Common Structure for LLCs

In an asset sale, the buyer purchases specific assets and liabilities of your business, not the LLC itself. This often includes:

• Equipment
• Inventory
• Contracts
• Customer lists
• Goodwill

The LLC entity remains in your control—you're just selling off what it owns. This type of deal is more common for small LLCs, especially those taxed as sole proprietorships or partnerships.

Tax implications:

• You’ll pay tax on the gain from each asset, and the type of tax depends on how that asset is classified.
  • Inventory and receivables are taxed as ordinary income.
  • Depreciated assets like equipment may trigger depreciation recapture, also taxed as ordinary income.
  • Goodwill is usually taxed as long-term capital gain if you've owned the business for more than a year.
• The buyer gets to "step up" the basis of the assets for future depreciation, which makes this deal structure more attractive to them.

Equity Sale: Selling Your Membership Interest

In an equity sale, you sell your ownership interest in the LLC itself—not just the assets. The buyer steps into your shoes as the new owner of the entire company, including its liabilities, contracts, and tax history.

Tax implications:

• You’re typically taxed on the entire gain as a long-term capital gain if you’ve held your interest for more than a year.
• You may still have to recognize ordinary income on certain "hot assets" (like receivables or depreciated equipment), depending on your entity structure.
• Buyers usually don’t get a step-up in basis for the underlying assets, which can make this deal less attractive to them unless you're selling an S Corp or C Corp.

3. Capital Gains Taxes and Ordinary Income

When you sell your LLC, not all of the proceeds are taxed the same way. The IRS distinguishes between long-term capital gains, which are typically taxed at lower rates, and ordinary income, which is taxed at your regular income tax rate. The way your sale is structured—and how the purchase price is allocated—determines how much of each type you’ll owe.

What Qualifies for Capital Gains Treatment

• Membership interest (in an equity sale) held for more than a year is usually taxed as a long-term capital gain.
• In an asset sale, intangible assets like goodwill, trademarks, and non-compete agreements typically receive capital gains treatment.
• To qualify for long-term capital gains rates, you must have held the asset (or your ownership interest) for at least one year.

Ordinary Income Triggers

Certain components of your sale will be taxed as ordinary income, including:

• Accounts receivable
• Inventory
• Depreciation recapture on previously depreciated assets (like equipment or furniture)
• Any services rendered as part of the sale (e.g., if you're paid to consult post-sale)

This distinction matters because ordinary income is taxed at much higher rates than capital gains.

2025 Capital Gains Tax Rates (Projected)

As of 2025 (barring changes in federal law):

• Long-term capital gains are taxed at 0%, 15%, or 20% based on your income level.
• An additional 3.8% Net Investment Income Tax (NIIT) may apply for high earners.
• Ordinary income is taxed at your marginal income tax rate, which could be as high as 37%.

4. Allocation of Purchase Price and Its Tax Impact

When you sell your LLC—especially in an asset sale—the total purchase price must be allocated across different types of assets. This allocation isn’t just an accounting exercise—it determines how much of the sale will be taxed as capital gains vs. ordinary income.

Why Allocation Matters

Buyers and sellers often have opposing tax interests:

• Sellers typically want more of the price allocated to capital assets like goodwill, which are taxed at lower long-term capital gains rates.
• Buyers want more allocated to depreciable assets like equipment and inventory, which they can write off faster to lower their tax bill.

Because of these differences, negotiating the allocation is a crucial part of the deal—and it needs to be agreed upon in writing.

Legal GPS Pro

Protect your business with our complete legal subscription service, designed by top startup attorneys.

• ✅ Complete Legal Toolkit
• ✅ 100+ Editable Contracts
• ✅ Affordable Legal Guidance
• ✅ Custom Legal Status Report

Learn more

IRS Requirements: Form 8594

When a business is sold in an asset sale, both the buyer and seller must file IRS Form 8594 to report the allocation of the purchase price. This form categorizes the sale into seven asset classes (cash, inventory, receivables, tangible property, etc.), and both parties must report the same numbers to avoid IRS scrutiny.

Tax Treatment by Asset Category

Some quick examples of how allocation affects taxes:

• Inventory → Ordinary income
• Equipment (above depreciated value) → Part capital gain, part depreciation recapture (ordinary income)
• Goodwill → Long-term capital gain
• Covenant not to compete → Ordinary income

5. State Taxes and Nexus Considerations

Federal taxes aren’t the only factor you’ll face when selling your LLC—state tax laws can significantly impact your net proceeds, especially if you operate in or have nexus with high-tax states. Depending on where your business is located (and where your buyers or assets are), you may owe capital gains taxes at the state level or have additional filing requirements.

State Capital Gains Taxes Vary Widely

• Some states, like California, New York, and New Jersey, tax capital gains as ordinary income, which can push your combined federal and state tax rate over 40%.
• Others, like Florida, Texas, and Washington, have no state income tax, meaning you’ll only owe federal capital gains tax.
• A few states offer favorable treatment for business sales under specific conditions—especially if the business qualifies as a small business or the seller is retiring.

Do You Have Nexus in Multiple States?

If your LLC does business in multiple states (e.g., online sales, remote employees, physical offices), you may have nexus—a sufficient business presence that triggers state-level tax obligations.

Nexus can result in:

• Multiple state tax returns after the sale
• Apportionment of income or gain between states
• Conflicting rules about how asset sales or goodwill are taxed

This is especially important for LLCs with remote teams or digital operations, where nexus can be created without a physical storefront.

6. Installment Sales and Spreading Out the Tax Hit

Selling your LLC doesn’t always mean collecting the entire sale price upfront. In some deals, the buyer pays you in installments over time—a structure that can also spread out your tax liability instead of triggering a massive one-time tax bill.

What Is an Installment Sale?

An installment sale is a deal in which you, as the seller, receive at least one payment after the year of the sale. This structure lets you recognize gain proportionally as you receive payments, rather than all at once.

Here’s how it works:

• You calculate your gross profit ratio (gain ÷ total sales price).
• Each year, you report that percentage of the payments received as taxable gain.
• Interest charged on the installment is taxed separately as ordinary income.

Tax Advantages of Installment Sales

• Lower marginal tax rates: By spreading income across multiple years, you may stay in a lower tax bracket.
• Defer taxes: You don’t pay tax on the full gain in the year of the sale—only on what you receive.
• Control cash flow: Helpful for buyers who can’t pay upfront and for sellers who want income stability over time.

Risks and Considerations

• Default risk: If the buyer stops making payments, you may have to pursue legal remedies—and recover only part of the agreed price.
• Loss of flexibility: You’re tied to the buyer for the duration of the installment schedule, which may last years.
• Interest income is still taxed: Any interest you earn on the unpaid balance is taxable as ordinary income, not capital gains.

When Installment Sales Make Sense

• You’re in a high tax bracket this year and expect lower income in future years.
• The buyer is a good credit risk but doesn’t have all the funds upfront.
• You want steady income post-sale to ease into retirement or fund other ventures.

7. Planning Ahead With a Tax Professional

One of the biggest mistakes business owners make when selling their LLC is waiting too long to think about taxes. By the time the deal is signed, your options for reducing the tax bill are limited. But with proper planning—ideally months before you sell—you can structure the deal to keep more of what you earn.

What a Tax Professional Can Help You Do

• Choose the right deal structure (asset vs. equity sale) based on your entity type and goals
• Optimize allocation of the purchase price to maximize capital gains and minimize ordinary income
• Model your after-tax proceeds under different scenarios
• Set up installment payments, retirement contributions, or trusts to reduce taxes or spread them out
• Navigate multi-state tax issues and file the correct paperwork at both state and federal levels

Working with a CPA or tax attorney before you sign a letter of intent (LOI) gives you more flexibility to negotiate smarter terms that reduce your tax burden.

Conclusion

Selling your LLC in 2025 can trigger a complex mix of capital gains, ordinary income, state taxes, and depreciation recapture—but with the right planning, you can significantly reduce your tax bill.

Start by understanding your LLC’s tax structure and the differences between an asset and equity sale. Then focus on optimizing the purchase price allocation, exploring installment options, and getting help from a qualified tax professional.

Before signing any deal, make sure you’ve run the numbers. The decisions you make during negotiation will directly impact how much you keep—and how smoothly the exit process unfolds.

Do you need a lawyer for your business?

The biggest question now is, "Do you need a lawyer for your business?” For most businesses and in most cases, you don't need a lawyer to start your business. Instead, many business owners rely on Legal GPS Pro to help with legal issues.

Legal GPS Pro is your All-In-One Legal Toolkit for Businesses. Developed by top startup attorneys, Pro gives you access to 100+ expertly crafted templates including operating agreements, NDAs, and service agreements, and an interactive platform. All designed to protect your company and set it up for lasting success.

Legal GPS Pro

Protect your business with our complete legal subscription service, designed by top startup attorneys.

• ✅ Complete Legal Toolkit
• ✅ 100+ Editable Contracts
• ✅ Affordable Legal Guidance
• ✅ Custom Legal Status Report

Learn more