Personal Goodwill: What the Owner Sells Separately
Why the relationships an owner built can be sold apart from the company, the tax it saves, and the agreement that usually kills the argument.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Personal goodwill is the value of a business that belongs to the owner as an individual — relationships, reputation, and skills that customers follow — rather than to the company. When it genuinely exists, the owner can sell it directly to the buyer as a capital asset, outside the corporation, avoiding corporate-level tax and the built-in gains tax.
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Why does it matter?
| Seller | Without personal goodwill | With personal goodwill |
|---|---|---|
| C corporation asset sale | Corporation taxed on goodwill gain, shareholders taxed again on distribution | Owner's share of goodwill taxed once, as capital gain |
| S corporation within five years of converting from C | Built-in gains tax at the corporate level on pre-conversion goodwill | Personal goodwill was never a corporate asset, so no built-in gains tax |
| Buyer | Amortizes goodwill over 15 years | Same — personal goodwill is also a 15-year intangible |
The buyer's position is unchanged, which is why buyers usually cooperate.
When does personal goodwill exist?
Courts have recognized it where the owner's relationships and expertise were the real source of value and were never transferred to the company. The leading cases involved an ice cream distributor whose relationships with supermarket owners and with the supplier's founder were personal (Martin Ice Cream, 1998) and accountants whose clients followed them (Norwalk, 1998). The argument fails when the owner has already signed an employment agreement or noncompete with their own corporation — that transfers the goodwill to the company. It also fails in businesses whose value rests on location, brand, workforce, or systems rather than the individual.
What does a defensible sale look like?
- No prior employment or noncompete agreement between the owner and the corporation, or one that expired well before the sale
- A separate purchase agreement between the buyer and the owner for the personal goodwill, with its own price
- An independent valuation supporting the split between corporate and personal goodwill
- A noncompete and consulting arrangement between the buyer and the owner, which is what makes the goodwill transferable
- Consistent treatment on Form 8594 and both parties' returns
The share allocated to personal goodwill must be realistic. Allocating most of the price to the owner in a business with 40 employees and a known brand will not survive review.
What does the owner pay tax on?
Long-term capital gain on the personal goodwill, plus the 3.8 percent net investment income tax where it applies. Amounts tied to future services — consulting fees — are ordinary income. A noncompete payment to the owner is ordinary income, so the agreements should assign value carefully.
Frequently asked questions
Does personal goodwill apply to an S corporation that was always an S corporation?
The tax benefit is smaller because an S corporation already has one level of tax, but it can still matter for basis, state taxes, and allocation among shareholders.
Can personal goodwill be sold in a stock sale?
It is normally part of an asset sale structure, since a stock sale transfers the whole company.
Does the buyer need a separate noncompete from the owner?
Yes. Without one, the buyer has not actually acquired the relationships, and the IRS will question whether anything personal was sold.
Is a valuation required?
Not by statute, but without an independent appraisal the allocation is difficult to defend.
Official sources
The IRS explains: “Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years.” — Internal Revenue Service, Publication 544 (2025), Sales and Other Dispositions of Assets, https://www.irs.gov/publications/p544
The Tax Court held: “This Court has long recognized that personal relationships of a shareholder-employee are not corporate assets when the employee has no employment contract with the corporation.” — United States Tax Court, Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998), https://dawson.ustaxcourt.gov/case-detail/1477-93
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk tests whether personal goodwill exists before a sale is structured around it. See pricing or book a free fit call.
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