As a business and tax attorney, John McGuire at The McGuire Law Firm is commonly asked, “how should I sell my business, and what are the tax implications?” This question brings about many issues; way too many to be discussed in a short article, but the owners of a C corporation should understand the basics behind a stock sale versus and asset sale and the advantages and disadvantages to each.
When the business owner is considering the sale of their business they must determine whether they wish to sell the stock or the assets of the business. A shareholder or seller would usually prefer a stock sale and a buyer would usually prefer an asset sale. When the stock of a C corporation is sold sale or exchange treatment is given to the transaction and therefore the shareholder will receive capital gain treatment on the amount received above the basis in their stock. The buyer prefers an asset sale because the purchase of the assets allows for a step up in basis, and the buyer does not carryover the seller’s depreciation schedule. This generally will afford the buyer greater deductions and less tax. Furthermore, when the stock of a corporation is purchased, the seller is relieved of liabilities and liabilities or exposures to such are transferred to the buyer.
The above issues show why the sale of C corporation assets is not favorable due to the fact there are not capital gains rates for corporations. A C corporation selling appreciated assets will pay corporate level tax even if a capital gain is generated. If cash is distributed to the shareholders after the sale of corporate assets, this is also a taxable event likely to be treated as a dividend or receive capital gains treatment. Regardless, double taxation has occurred.
A C corporation may be able to mitigate some or all of the double taxation based upon the current tax attributes of the corporations. For example, the corporation may have a net operating loss or certain credits that carry forward.
Any business considering liquidating or the sale of stock or assets should contact their business attorney and/or their tax attorney to discuss the full implications of the transfer. A Denver tax attorney or business attorney at The McGuire Law Firm can assist you with your tax or business questions or issues.