The Three Major Players in a Business Sale
There are three major players in the sale of a business:
Buyer
Seller
Government
Minimizing taxes plays a major role in structuring and negotiating a deal. Many promising deals have fallen through because the buyer and seller couldn’t agree on how to structure the deal to minimize taxes.
Business Structure and Tax Implications
Sole Proprietorship or Partnership
If your company is set up as a sole proprietorship or partnership, you will be selling the assets of the company. Although there are some technical differences, the income from the sale of your business will flow through into your personal tax return in a similar fashion as it does now.
S-Corporation or LLC Corporation
If your company is an S-Corporation or LLC Corporation, you can choose to sell either the assets or the stock of the corporation. Because the income flows directly into the stockholders’ personal income in these types of corporations, a stock and asset sale yield similar taxation. Therefore, the asset vs. stock decision is usually made for non-tax reasons. If you own an S-Corporation/LLC, you have some flexibility from a tax standpoint in whether you sell stock or assets.
C-Corporation
C-Corporations are a tax obstacle for the seller if assets (not stock) are sold. If you are selling a C-Corporation, for all practical purposes you must sell the stock, not the assets.
If you sell the assets, the corporation will have to pay tax on the sale, then you will personally pay tax again on the after-tax amount you remove from the corporation.
Example:
Combined state and federal tax rate: 40% (corporation and individual)
For each $1,000 in assets sold:
The corporation pays $400 in taxes and keeps $600
The corporation pays you $600
You must pay $240 in taxes
You are left with $360
Total tax rate: 64%
Asset Sale vs. Stock Sale Considerations
While an asset sale is a tax nightmare for the seller of a C-Corp, a stock sale can be a nightmare for the buyer.
Buyer Concerns with Stock Sales
By definition, the buyer of stock assumes all liabilities of the corporation, both on and off the balance sheet. If a lawsuit that nobody foresaw comes up three or five years from now, it’s the buyer’s problem. That understandably makes buyers extremely nervous about buying stock.
The buyer also loses a lot of tax advantages that an asset purchase carries with it:
In an asset sale, assets can be depreciated starting from the buyer’s (high) basis.
In a stock purchase, the buyer can only depreciate assets starting from the seller’s (already depreciated and usually low) basis.
Key Tax Considerations for All Sellers
Regardless of the legal form of business, there are two tax considerations for all sellers:
1. How Income is Taxed
Personal income or capital gains
Long-term federal capital gains rates at 20%
Top personal income rates over 30%
This can be an important factor.
2. Timing of Income
When income is earned (and taxable) matters.
There are methods for structuring payments that can help the buyer and seller to work out a mutually agreeable payment structure for tax purposes.
Importance of Legal and Tax Professionals
With the importance of tax considerations, your accountant and/or tax attorney should play a major role in helping you plan the sale. A good tax and business attorney in Atlanta is a necessity in selling a business.
Additional Resources
Ansari Law Firm BBB Business Review
Sales Tax Articles
Georgia Redetermination Hearing
Sales Tax Audits
Buying a Business
Selling a Business
8 Tax Tips about Debt Cancellation.
Frequently Asked Questions
What are the main parties involved in a business sale?
The three major parties are the buyer, the seller, and the government. Each has distinct roles and interests, especially regarding tax implications and deal structure.
Why do taxes have such a big impact on business sales?
Taxes can significantly affect the final financial outcome for both the buyer and the seller. Disagreements over tax structuring can cause deals to fall apart, so careful planning is essential.
How does my business structure affect the tax treatment of the sale?
It depends on whether you’re structured as a sole proprietorship, partnership, S-Corp, LLC, or C-Corp. For example, C-Corps are subject to double taxation in asset sales, while S-Corps and LLCs offer more flexibility.
What is the difference between an asset sale and a stock sale?
An asset sale allows the buyer to depreciate assets based on the new purchase price but can be tax-heavy for sellers. A stock sale avoids double taxation for sellers but makes buyers liable for past and unforeseen company liabilities.
Why should I hire legal and tax professionals before selling my business?
The complexities of tax law and deal structuring require expert guidance. Legal and tax professionals can help minimize your tax burden and protect your financial interests during negotiations.
