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Does your Goodwill Go Home at Night? The Sale of Personal Goodwill Offers Considerable Tax Planning Opportunities for Closely-Held Corporations


August 31, 2022

Read Time

3 minutes


This article was originally published on April 6, 2022 and republished on August 31, 2022. 

It is important to consider tax planning opportunities when selling your business, particularly where a business is a closely-held professional service corporation and the proposed structure of the deal is an asset sale. In this situation, the owners should consider selling each owners’ personal goodwill associated with the business separately from the business’s corporate assets, which may significantly reduce their tax liability.

Goodwill can mean many things in the business context, but it is often viewed as the value of a trade or business attributable to the expectancy of continued customer patronage, whether due to the reputation of the business or some other factor.  There are generally two types of goodwill. The first is goodwill inherent within the business itself, which may consist of client lists, records, trained employees, location, leases in place, etc. The second is personal or professional goodwill, attributable to the individual skill, ability, judgment, personality, and reputation of the persons working for the business. Personal goodwill exists when an individual’s own reputation, expertise, ability to receive referrals, or personal connections create an intangible but often significant value that inheres to that individual rather than to the business itself. In other words, personal goodwill is an individual asset and not a company asset that can be separately sold outside of a corporate solution.

Personal goodwill is often found in professional businesses, as these businesses thrive on their ability to offer unique services due to the advanced education and special skills of their owners. Courts have long recognized that personal goodwill is a salable asset that can (i) be separately sold by individuals alongside the sale of the broader professional practice, and (ii) can potentially (but not always) inure to the individual professional. However, even in the best of circumstances, it is crucial to establish facts to support such a finding, and an independent valuation of each owner’s personal goodwill is strongly encouraged. Unless the transaction is carefully planned, the IRS could recharacterize the goodwill as owned by the corporation (therefore, subjecting the goodwill asset to corporate-level taxation). Facts and circumstances are instrumental in personal goodwill transactions.

Ideally, planning for the sale of personal goodwill should begin well before a sale of the corporation is contemplated. Counsel should review corporate documents to ensure that the shareholders have not potentially transferred ownership of their personal goodwill to the corporation by entering into long-term employment agreements or restrictive covenants. A few Tax Court cases have held that by entering into these agreements, the shareholder in essence sold their personal goodwill to the corporation and upon exit, that shareholder could be potentially prevented from leveraging any personal goodwill in the marketplace. If any such employment agreements or restrictive covenants exist, fear not; an element of personal goodwill may very well still apply and counsel should be engaged to consider many factors. The transaction (and ideally the letter of intent) should contemplate two separate asset sale transactions: one for the target corporation’s sale of its tangible and intangible assets (including corporate goodwill), and the other for the shareholders’ sale of their personal goodwill. Each agreement should clearly state how the shareholders will sell and transfer their personal goodwill to the prospective buyer.

The corporate and tax attorneys and Levenfeld Pearlstein have vast experience in advising professional firms on exit strategies including transactions with an element of personal goodwill. For more information on whether the sale of personal goodwill is a viable option for your business, please contact Russell Shapiro at or Rob Garner at

Filed under: Corporate

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