J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Sales of Business Interests

The type of interest you own governs the tax treatment accorded to the sale of your interest.

Sole Proprietorship

If you sell your incorporated sole proprietorship, you are viewed as selling the assets of the business. The sale of all the assets of a business is discussed in Chapter 6.

Partnerships and LLCs

PARTNERSHIPS

Gain or loss on the sale of your partnership interest is treated as capital gain except to the extent any gain relates to unrealized receivables and inventory items. Gain in this case is ordinary income.

Unrealized receivables

These are amounts not previously included in income that represent a right to payments for noncapital assets, which include inventory, services rendered, and services to be rendered.

If you receive items that were inventory to the partnership, they may be treated as capital assets to you. However, if you dispose of the items within 5 years, then any gain with respect to these items is ordinary income, not capital gain.

LLCs

Generally, the rules governing the sale of a partnership interest apply with equal force to the sale of an interest in an LLC. However, there are 2 special situations to consider:

1. Sale of multiple-owner LLC to a single buyer. The entity is treated as hypothetically making a liquidating distribution of all of its assets to the sellers, followed by a deemed purchase by the single buyer of all the assets now hypothetically held by the sellers. The sellers then recognize gain or loss ...