When selling a corporate business, there are several ways to minimize the resulting tax bill. This article summarizes some of the more important tax and business considerations.
Existing corporate businesses can basically be sold in two ways: by selling either the business assets or the corporate stock. Buyers often prefer to purchase the assets of an existing business to have some protection from acquiring unknown or contingent liabilities, while sellers normally prefer to sell the stock of the corporation that conducts the business. A sale of stock by noncorporate shareholders (e.g., individuals) generally results in long-term capital gain that is taxed at a current maximum rate of 15%. (This long-term capital gain rate is currently scheduled to increase to 20% in 2013.) Because of the single level of taxation associated with a taxable stock sale, sellers usually prefer it to an asset sale followed by liquidation of the corporation, which may result in a greater tax liability.
The tax results of an asset sale are generally less favorable to the sellers since the corporation is generally liquidated to get the sales proceeds into the sellers’ hands. Thus, a C corporation is taxed on the gain from the asset sale. Then, the shareholders are taxed on the liquidation proceeds as if they had sold their stock for the cash and any property distributed in complete liquidation of their stock, resulting in double taxation.
While sellers generally favor stock transactions, they may prefer an asset sale in the following circumstances:
The selling corporation may have unused net operating loss or capital loss carryforwards that can offset any corporate-level gain on the sale of its assets.
If the assets to be sold have a high basis, there may be no corporate-level gain from the sale. If the shareholders’ stock basis exceeds the value of the liquidation proceeds, gain at their level could also be avoided.
An asset sale by a C corporation should be more acceptable to sellers who plan to use the proceeds to acquire a new business that will be operated in the same corporate shell as the old business (thus avoiding the second level of tax on the sale because the proceeds are not distributed to the shareholders).
As you can see from this discussion, a stock transaction often results in the best tax and business answer for the seller, so please contact us and we will be glad to work with you to structure any disposition transaction in the most favorable way, considering all tax and general business issues.