Our company is structured as a C-corporation, and an asset sale will subject us to crippling double taxation. How can we allocate a portion of the purchase price to personal goodwill to protect our net proceeds?

Question

Tyler Smith · Accepted Answer

When a C-corporation sells its assets, the corporation pays federal and state income tax on the gain, and the shareholders pay individual capital gains tax again when distributing the remaining cash. To mitigate this double taxation, sellers often allocate a meaningful portion of enterprise value to personal goodwill rather than corporate assets.

Personal goodwill represents the value derived from the founder personal reputation, technical skill, and individual client relationships, rather than the corporate entity brand, contracts, or systems. Because personal goodwill belongs directly to the individual shareholder, the proceeds from that specific allocation bypass the corporate tax return and are taxed once at individual capital gains rates.

To defend a personal goodwill allocation against an IRS challenge, two criteria must be satisfied:

- The founder must not have signed an employment agreement or non-compete that transferred their personal goodwill to the corporation prior to the sale.
- You must commission an independent valuation before closing to establish the defensible economic value of your personal relationships and industry standing.

At closing, the buyer will purchase the corporate assets from the company and your personal goodwill directly from you, paired with a non-compete and consulting agreement. This structure delivers substantial after-tax savings while giving the buyer their desired asset basis step-up.