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Value Creation Blog

Using An 831 (b) Captive As Part Of Your Business Exit Strategy

Posted by Josh Patrick

831 (b) captive insuranceToday’s environment is not a good one for selling your business.  In many instances it’s better to sell your business to key employees and management than to a third party.

The goal when selling to your managers is to reduce the total tax cost of the transaction.  We know that when we do a stock sale, the maximum amount of total taxes are paid.  This is because the buyer uses after tax dollars to pay for stock.

In a larger sale the challenge becomes how to make a transaction a deduction for the buyer and have the seller not recognize the income until they actually want to spend the money.  One way of achieving this goal is through the use of an 831(b) captive insurance company.

Using a captive as part of a business sale allows the buyers to deduct the premiums that are paid to the captive and the seller doesn’t have to recognize the underwriting profits that would come from the captive.  The good news about this strategy is we have delayed the taxes.  When appropriate, the seller can either have income come out as a dividend at a lower average tax rate than when he or she was running their business.

As always, you should review this or any complicated sales strategies with appropriate advisors.  In this particular situation your advisors should be a tax attorney, your CPA and the promoter for the captive insurance company.

I’m interested in learning if you’ve thought about selling your business to your managers and if so, what have you done to manage your tax burden?  If you’re an adviser, what do you tell your Clients who selling to their managers that helps them manage their tax cost?

Josh Patrick

PS.  I’ve written a special report on what you need to do to successfully exit your business.  Click on the button below to get our report.

exit readiness report

Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), Member FINRA/SIPC. Stage 2 Planning Partners and NFPSI are not affiliated.

This article is published for residents of the United States only.  Registered Representatives and Investment Adviser Representatives of NFP Securities, Inc. may only conduct business with residents of the states and jurisdictions in which they are properly registered.  Therefore, a response to a request for information may be delayed.  Not all of the products and services referenced on this site are available in every state and through every representative or advisor listed.

Topics: financial independence planning, business exit planning, 831(b) captive insurance company, succession planning

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