OVERVIEW OF DEAL

STRUCTURES WHEN SELLING

A BUSINESS – PART 1 (TAX

CONSEQUENCES)

By TREVOR CROW

www.biztaxbuzz.com

Introduction

For business owners, the sale of their business will likely be one of the largest events they encounter during their life.

Accordingly, the business owner should take the time to understand the process with the guidance of an expert who has experience with business sales to reduce the risk and maximize profit.

In this two-part series of posts, I examine the most common types of deal structures that business owners use when selling their businesses. Throughout this series of posts I refer to stock generically as the representation of ownership interests in the business, but the same concepts apply if you’re dealing with membership interests in a LLC.

Introduction

While there are many variations of deal structures

available, the vast majority of deals fall under one

of two broad categories that are addressed below:

(1) asset sales; and (2) stock sales.

One of the main factors to consider when deciding

between an asset sale and a stock sale is the tax

consequences.

Asset Sales

An asset sale results in the best tax benefit for the buyer. In an asset sale, a buyer purchases only the assets of the selling business that it agrees to purchase and the price paid is allocated among each of the purchased assets.

Buyer’s tax basis in all the purchased assets will be equal to the total purchase price. And the Buyer’s basis for each asset will be the amount that the parties agree to allocate to each of the assets purchased (provided the allocation is reasonable).

Asset Sales

In general, the Buyer will want to allocate the most

money to assets that depreciate on the shortest

depreciation schedule.

An asset sale will benefit the buyer when taking

depreciation and will also benefit the buyer when

there is a subsequent sale of the assets purchased.

Asset Sales

On the other hand, the tax consequences to the

seller in an asset sale are not as favorable.

If the seller is a C corporation for example, then the

gain from the asset sale will be taxed at the

corporate level for federal income tax purposes,

and then the remaining cash left in the company will

be taxed to shareholders of the company when the

proceeds of the sale are distributed as dividends.

Asset Sales

If the entity is an S corporation or an LLC, there will

usually be only one level of tax in an asset sale

because these entities are considered pass-through

entities for tax purposes.

However, as explained below the tax treatment to

the seller in a stock sale is usually more beneficial

to the seller regardless of seller’s form of entity.

Stock Sales

A stock sale is typically beneficial to the seller. In a

stock sale, the buyer will get a basis in the stock,

which can’t be amortized, but typically does not get

an increased basis in the purchased assets (unless

the buyer makes a Section 338(h)(10) election,

which is outside the intended scope of this post).

Stock Sales

With a stock sale, the seller’s entity type doesn’t matter because the shareholders will only be subject to one level of taxation and typically at lower capital gains rates.

While the lower capital gains rates make a stock sale beneficial to all forms of seller entities, often a stock sale is not seriously considered as an option unless the seller is a C corporation and subject to the double taxation that occurs if the sale is structured as an asset sale.