If you are a business owner considering the sale of your business, please put yourself in a position for an asset sale rather than a stock sale by holding your business in a Limited Liability Company (LLC) or an S Corporation. There are two clear reasons why buyers prefer to buy assets:
- The buyer will receive a tax benefit by being able to depreciate the assets purchased. This can provide a large tax deduction during the buyer’s ownership of the business.
- The buyer can avoid risk by leaving the liabilities in the old company.
Stock Sale = C Corporation
If you own a C Corporation, therefore, you will be stuck with many unnecessary headaches. If the buyers will only buy stock, you will face a significant tax problem when you first have to pay income tax within your corporation when the assets are sold and then you have to pay a second tax when you distribute the cash out of the C Corporation. Or, you will have a buyer who wants to implement many creative strategies about how to attempt to obtain these two benefits (tax deductions and avoidance of liabilities) and the structuring of the deal may get more complicated.
The basic difference between an asset sale and stock sale creates many of the topics addressed in this series on Purchase & Sale Agreements.
- Business Purchase & Sale Agreements, May 29, 2012
- C Corporation Business Owners are at Risk of Losing Millions, April 22, 2012