Q. I am at the point where I am speaking with attorneys to try to figure out who would be best to represent us in the sale of our business. So far, I have spoken with two and each have given me very different information. One says we should try to sell the business's stock and that would mean a lower tax implication for the sale and would save time and money on attorney's fees over an asset sale. The other said we should do an asset sale and it wouldn't make a difference in the tax implications or the time needed to write up contracts.
I would love your advice on which would be most favorable for us. ~Paula
A: Here’s the deal. There are two ways to sell your corporation.
• You could sell your stock.
o In that case, the owner just steps into your shoes.
o The new owner is just buying the paper that represents ownership in the assets and liabilities.
o If there are liabilities that the corporation owes such as accounts payable, notes etc., the new owners will be assuming.
• The corporation can sell assets to the new owners.
o After the sale, the corporation is normally liquidated.
A stock sale is best for you because this would be a capital gain and the maximum tax rate is 15% federal plus state. On an asset sale, the gain is at ordinary income rates which vary from, I would imagine 15% to 35%, plus state tax.
Most of the time the buyer wants to do an asset purchase because:
• They get to depreciate the equipment. This will save them some future tax dollars. They do not get new depreciation on a stock sale.
• If they finance the purchase, it is easier to deduct the interest.
• If they buy stock, they are buying whatever dirty laundry you might have in the closet. For example, if the IRS should audit the corporation and impose additional tax then, since they are the owners the corporation would have to pay the tax, so they are on the hook.
I hope that this helps.
