Asset sales involve sale of some or all of a business’ tangible and intangible assets.
In an asset sale, you are selling the different assets that the business owns. Assets may be:
- Tangible: Land, buildings, equipment, cash, investments, and inventory
- Intangible: The goodwill your business has built up during its years of operation, customer lists, patents, copyrights, and trademarks
If your business is not incorporated, for example, a sole proprietorship or partnership, an asset sale is the only selling option, as there are no share certificates of ownership to transfer in a sale. To determine a selling price for the business, the different assets of the business are individually negotiated to arrive at a price or appraised.
Usually, the following documents are prepared:
- Sale and Purchase Agreement with purchase price allocation among the assets;
- Covenant not to Compete by seller;
- Grant deed if real property is being sold;
- Bulk sale notice;
- Bill of Sale
- DMV transfer documents;
- Tax Clearance Certificates;
In a stock sale, a corporation’s shareholder sells their existing stock to a new owner. The new owner can be an outsider or another existing shareholder. In this transaction, the buyer obtains stock. The assets and liabilities of the corporation generally remain the same. This means the buyer is the new owner of the corporation. As such, the buyer may not have personal liability. However, the buyer is buying a company that may be at risk from future litigation from corporate liabilities that are not paid and cleared or may not accrue for some time, such as for product’s liability claims. In some instances, the buyer could become liable for accrued but unpaid corporate level sales or employment taxes existing at the time of sale. The buyer must conduct full due diligence on the corporation before close of escrow on the sale and payment is made to the Seller. Tax clearance certificates are imperative to the buyer before the purchase of the stock is completed. The seller of stock often signs a covenant not to compete with the corporation.
Not all types of business are eligible for a stock sale. A sole proprietorship, partnership, or LLC does not issue stock. When selling these types of businesses, the buyer purchases the entire ownership interest. Only C corporations or an S Corporation need to make the choice about selling assets vs. stock. Only certain types of persons can be owners of S Corporation stock or else the S Corporation status can be lost.
The decision about whether an asset purchase or stock sale is best for your individual situation is complex and often difficult. It’s best to consult with Yahnian Law Corporation. We have significant experience with stock sales, business mergers and acquisitions. We can assist either a buyer or seller through the entire process.
Over the years we have provided legal services with respect to the sale and purchase of partnership and LLC interests and companies. There are many aspects of such a sale that combine both elements of stock sale and the sale of assets. Because the pathway to successfully consummating such sales is complex and often hazardous in trying to navigate the tax code, creditor issues and other legal aspects, you should contact YAHNIAN LAW CORPORATION.
We have handled several business mergers over the years.
A merger is an agreement that unites two existing companies into one new company. There are several types of mergers and also several reasons why companies complete mergers. Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share. All of these are done to increase shareholder value. Often, during a merger, companies have a no-shop clause to prevent purchases or mergers by additional companies. Corporations, Partnerships and LLCs may all conduct a merger.
A merger is the combination of two companies into one by either closing the old entities into one new entity or by one company absorbing the other. In other words, two or more companies are consolidated into one company.
- Mergers are a way for companies to expand their reach, expand into new segments, or gain market share.
- A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity.
- The five major types of mergers are conglomerate, congeneric, market extension, horizontal, and vertical.
When you sell your business you may incur substantial taxes. In fact, if you’re not careful, you can wind up with significantly less than the sale price, after all taxes are paid. However, with our assistance and planning it’s possible to minimize or defer at least some of these taxes.
Unless certain exceptions apply, the seller will be taxed on the profit they make from selling the business. But, you may be able to control the timing through the terms of the deal.
The amount of tax that the Seller will ultimately have to pay depends upon whether the money they make from the sale is taxed as ordinary income or capital gains. With our help, you can negotiate and allocate more of the gain to capital assets as opposed to ordinary income assets, and have more money in your pocket after the sale.
If you are the buyer, you will want to maximize the amount of the purchase price allocated to deductible, depreciable and amortizable assets, such as Goodwill, Customer lists, and equipment. Generally, you will want to buy the assets not the stock of a corporation. We help our clients plan and negotiate the purchase of a business to maximize tax benefits.
Tax-Free Reorganizations Defer Tax
YAHNIAN LAW CORPORATION has designed, planned, structured and implemented numerous tax free corporate mergers and reorganizations for its clients over the years.
If your business is incorporated and you are selling out to a larger corporation, it may be possible to defer any tax due on the sale. How can this be done? By structuring the sale as a corporate reorganization, and accepting the purchaser’s stock in exchange for your own business’s stock or engaging in any of the other tax free organization formats allowed in the tax code.
If you manage to comply with the IRS’s extensive rules for these types of transactions, you won’t be taxed on the value of the stock you receive, until you sell it at some point in the future. By that time, the stock may have received a step up in income tax basis, or you may engage in another tax free reorganization at that time. If you receive other property or tax in addition, however, you’ll have to recognize taxable gain to the extent of this “boot.” We can help you structure the transaction to minimize this ‘boot’.
Generally, this type of transaction advantageous only if you are selling out to a buyer whose stock is a good investment. Remember, you’ll be exchanging a nondiversified investment over which you had control (your own company) for a nondiversified investment over which you may have little or no control. Under Federal tax laws, you generally can’t go out and immediately sell the buyer’s stock; you may be required to hold it for as long as two years, or you will lose the tax-free status of the transaction. In two years, almost anything can happen to the value of the stock.
If your buyer proposes structuring the deal as a merger or corporate reorganization, you should immediately seek our advice and assistance. Tax free reorganizations are far too extensive and complex to attempt to do one without expert assistance.