Selling equity
		Capital gains taxes
		Handing over the reins
		Estate taxes

When you decide to sell a stake in your business, some of the major factors associated with the decision include:

• Using your stock as compensation. If you own a profitable business, your company stock has some value that can be used as currency to hire and compensate employees. To sweeten a job offer, for example, you may offer shares of company stock. Most likely, you will use stock options. Options vest according to the terms of an option agreement.
  
  You may decide to grant a certain number of options immediately. Additional options may vest later as deferred compensation. You may also contribute shares of company stock to a retirement plan for employees.
  
  
• Selling stock to raise capital. You may sell shares of company stock to raise equity capital. A healthy debt-equity ratio is an important financial measure. For example, if you have $1 million in debt and only $100,000 in equity, you may find yourself unable to borrow additional amounts. You may also be strapped by high monthly interest payments. By keeping your debt-equity ratio low, you can prevent such a loss in financial flexibility. Selling equity improves your debt-equity ratio.
  
  You may decide to sell a small percentage of your stock, or minority stake. You may also decide to sell shares to a passive investor -- a distributor or vendor, for example, that shares long running ties with you and is happy to sit on the sidelines. On the other hand, you may sell shares to a venture capital firm that seeks a more active role in running your company.
  
  If you plan to remain a key decision-maker in your company, you may wish to retain a majority stake of your stock. A key part in selling equity is calculating how much in voting rights the buyer will receive. You may wish to avoid selling too much in shares with voting rights attached at the risk of being outvoted on shareholder-decided matters.
  
  
• Evaluating your future ownership plans. Once you begin to share ownership of your company, your next major step may include handing over some of the managerial responsibilities, leaving the company, or retiring. You may plan to sell most of your remaining stake one day, particularly if you sell equity to a venture capital firm.
  
  You should communicate your future intentions as early as possible to shareholders, employees, customers, and vendors. If you plan on selling the company, the U.S. Small Business Administration (SBA) recommends that you have your financial statements audited. Audited statements provide an independent, outside view of the financial position of your company. You may also want to pay for an appraisal of your business.
  
  The odds are, however, that your business will remain small and in private hands. A major problem of privately held businesses, of course, is that the owner often doesn't find a suitable replacement to take over the helm. This successor problem is a major reason that many family owned businesses go under when the original owner retires or dies. By planning ahead and communicating your intentions, you are likely to be more successful in finding a successor.
  
  
• Tax consequences of selling company stock. When you sell shares of your stock, you earn a capital gain. The amount of capital gain you earn depends on the basis of your shares and the sale price of shares. If you transfer shares to a spouse, your spouse inherits the shares' fair market value (FMV) as his or her basis. Generally, you report capital gains on Schedule D of IRS Form 1040. For information on calculating the basis of your business assets, see IRS Pub. 551.
  
  If your stock is considered qualified small business stock, you may be eligible to roll over some or all of the gain when you sell. In order to be eligible, you will have to replace the stock with stock that is also considered to be qualified small business stock. You owe taxes on the capital gain when you sell the replacement stock, using the cost you paid for the original stock plus any gain recognized as your new basis. This transaction is called a Section 1045 rollover after the section of tax code that governs it.
  
  If you hold qualified small business stock for more than five years, you may be eligible for a Section 1202 exclusion. This rule allows you to exclude from your income one half of your gain on the sale or trade of qualified small business stock. For additional information on Section 1045 rollovers and Section 1202 exclusions, see IRS Pub. 550.

Next Topic: Capital gains taxes