We operate as a C-Corporation, and the buyer is demanding an asset sale to get a tax step-up, which would trigger devastating double taxation for our shareholders. How do we structure a personal goodwill allocation to bypass the corporate tax level and preserve our net exit proceeds?

Question

Tyler Smith · Accepted Answer

When a buyer insists on an asset sale of a C-Corporation, they are seeking to write off the purchase price through depreciation while leaving you with a massive tax bill. The corporation pays tax on the asset sale, and then you pay tax again when you distribute the proceeds to shareholders. This double taxation can wipe out over half of your proceeds.

To bypass this, you can structure a portion of the transaction as the sale of personal goodwill. Personal goodwill represents the reputation, relationships, and expertise of the founders, independent of the corporation itself. Under tax law, personal goodwill is an asset owned by the individual, not the corporation. By allocating a significant portion of the purchase price to personal goodwill, that portion is taxed only once at the individual capital gains rate.

To defend this structure against IRS scrutiny, you must prove that this goodwill actually belongs to you personally. You must not have an existing non-compete agreement with your own corporation that transfers your personal relationships to the company.

You can document this through your EOS Accountability Chart. If your seat as the Visionary shows that you hold the key relationships with strategic partners and vendors outside of the corporate contract, you have a strong case. Work with your tax advisor to draft a separate personal goodwill purchase agreement alongside the main asset purchase agreement to secure these tax savings.