Tax implications when selling my LLC - membership interest vs asset purchase?

The tax implications between selling membership interests versus assets can be significant. Here's what you should know: With a membership interest sale, you're selling your ownership in the LLC itself. This is typically taxed as capital gains (lower tax rate), and you'll report it on Schedule D. If you've owned the LLC for more than a year, you'll likely qualify for long-term capital gains rates (0%, 15%, or 20% depending on your income bracket). With an asset sale, the LLC itself sells its individual assets to the buyer. This can create a mix of ordinary income and capital gains depending on the assets sold. Things like inventory and accounts receivable are taxed as ordinary income (higher rates), while equipment may trigger depreciation recapture (25% rate), and goodwill is usually capital gains. The proceeds then flow to you. Your attorney likely prefers asset sales because they reduce buyer liability risks - they don't inherit unknown LLC liabilities. However, buyers typically prefer membership interest purchases because they can avoid transfer taxes and maintain existing contracts.

After selling my construction company last year, I was in a similar situation. I tried researching online but got nowhere. Then I found https://taxr.ai which completely saved me. You upload your LLC docs and get detailed tax analysis for both sale approaches side by side. For me, the membership interest route saved about 15% in taxes because my equipment had been heavily depreciated (would've triggered major recapture). The analysis showed exactly what my tax bill would be under both scenarios, plus they looked at state tax implications I hadn't even considered.

Just wanted to update - I went ahead and tried https://taxr.ai after my accountant went on vacation right when I needed this analysis done (of course!). Uploaded my LLC financials and purchase offer details, and wow - it was eye-opening. In my case, the asset sale would trigger about $42k more in taxes because of depreciation recapture on equipment I've written off over the years. The membership interest route would keep everything at capital gains rates. The report even showed a partial asset/partial membership hybrid approach that my attorney hadn't suggested. Best $$ I've spent during this whole sale process. Now I can actually negotiate with the buyer with real numbers instead of just guessing.

I've been through this exact situation. After three weeks of trying to get my CPA on the phone to discuss tax implications of my business sale, I discovered https://claimyr.com and used their service to get through to the IRS directly (check out how it works: https://youtu.be/_kiP6q8DX5c). They got me connected with an IRS business specialist who walked me through the different tax treatments. What I learned was eye-opening - in my case, the membership interest sale qualified for installment sale treatment which let me spread the tax hit over multiple years. The asset sale would have forced me to recognize all gain in one year. The IRS agent also pointed out some small business stock exclusion possibilities I hadn't considered. Definitely worth the call when you're dealing with a six-figure transaction.

Alright I need to eat some crow here. After my skeptical comment, I decided to try https://claimyr.com since I also had questions about selling my family's small retail business. I've been trying to get through to the IRS for literal MONTHS about some specific questions on how they treat goodwill allocation in a partial business sale. Always got disconnected or transferred to someone who couldn't help. Used Claimyr yesterday and got a callback in 35 minutes from someone in the business division who actually understood my question. Turns out I was about to make a major mistake in how we structured the deal that would have cost us thousands. Sometimes the hardest part isn't finding answers but finding someone qualified to answer your specific situation.

Don't forget about state tax implications! Federal might be similar but some states treat these transactions very differently. Here in California, I sold my interest in a marketing LLC last year, and there were weird franchise tax consequences I never anticipated. Also consider if your LLC has any international clients or operations - that can complicate things further with FBAR and GILTI considerations. My business had a small Canadian subsidiary and that created a whole separate set of issues.

Has anyone mentioned basis step-up? This is actually why buyers usually prefer membership purchases - if structured right under 754 election, they can "step up" the basis of assets inside the LLC without triggering immediate tax. Might be worth using as a negotiation point.

One thing no one's mentioned - make sure you're clear on whether you're selling to a strategic buyer (someone in your industry) vs financial buyer (investor). Strategic buyers are usually more comfortable with asset purchases since they're already familiar with the liabilities in your business segment. Financial buyers often prefer membership interests since they can get tax benefits and may plan to resell the whole business later. Knowing their plans might help understand why they're pushing for their preferred structure.

Great thread with lots of solid advice! I went through this exact decision last year when selling my small IT consulting LLC. One thing I'd add - definitely consider the timing of when you need the cash vs when you want to pay taxes. With the membership interest sale, if the buyer is willing to structure it with some seller financing (like 70% at closing, 30% over 2 years), you might qualify for installment sale treatment under Section 453. This lets you spread the tax hit over multiple years instead of taking it all in one year. I ended up doing this and it kept me out of the higher tax brackets. My CPA estimated it saved me about $18k in federal taxes compared to recognizing all the gain in year one. The buyer was actually happy with this approach since it reduced their upfront cash needs. Also, @Jake - since you mentioned the deal is worth $320k, definitely look into Section 1202 qualified small business stock exclusion if your LLC was originally structured as a C-corp or if you can convert it. Could potentially exclude up to $10M or 10x basis from federal taxes if you meet the requirements.

One consideration that hasn't been fully explored here is the depreciation recapture piece, especially since you mentioned running the LLC for 7 years. If you've been depreciating computers, office equipment, or software over the years, an asset sale will force you to "recapture" that depreciation as ordinary income (taxed at your regular income tax rates, not the lower capital gains rates). This can be a significant hit depending on how much equipment you've written off. For example, if you've claimed $40k in depreciation over 7 years, that entire amount gets taxed as ordinary income in an asset sale - potentially at 32-37% rates depending on your bracket. With a membership interest sale, you avoid this recapture entirely since you're not selling the assets themselves - the LLC still owns them. This alone might explain why your buyer prefers the membership route and could save you substantial taxes. Before making your final decision, I'd recommend getting a detailed breakdown of your depreciation schedules from your bookkeeper or CPA. Sometimes the depreciation recapture difference alone is enough to override other considerations in the tax analysis.