client selling s corporation

[oceanlovin'ea]

Client called today. He has a buyer for his business, an s corporation. The sales price is divided between an amount for "fictitious name" (He wants to keep the name of the business) and an amount for the customer base or good will. He is not buying any equipment or supplies.

This man started the business from scratch so his basis in the customer base would be zero. I am not sure about the "fictitious name". I would assume that this would be zero basis too.

So it would appear to me that what he sells the business for would all be income. Am I correct?

Linda, EA

[Uncle Sam]

S Corp Sale

You're not making clear what is actually being sold - specific assets of the corporation - or the whole corporation stock?

[oceanlovin'ea]

He is not selling any assets. He is selling the name of the company and the customer base or goodwill. I specifically asked if the buyer was buying the equipment and he said no.

I guess I get confused about what selling stock actually means. The business, ABC Maintenance, will belong to the buyer.
I just talked to him. He will keep the equipment that he has which is not very much. He said he might do some repair work from time to time. That would be a new schedule C business.
Linda, EA

[JoshinNC]

Unless the purchase agreement specifically says its a stock sale

Its an asset sale no matter what the buyer and seller want to call it. While you can't see or touch a name and goodwill they are still assets of the corp, intangible assets.

[oceanlovin'ea]

So that would mean that client is selling 2 intangible assets, brand name and customer base or goodwill. These both get capital gain treatment. Is that correct?

Client is meeting with buyer tomorrow afternoon and he just wanted to make sure that the contract was being worded in the correct way.

Linda, EA

[Gretel]

My 5 cents. If a buyer buys all the stock of a corporation or just the assets or part of the assets has liability consequences that should be discussed with a lawyer. I know you represent the seller and if the seller does not intent to use the corporation in the future he needs to dissolve it unless stocks were sold.

Selling the dba name (business name) is not necessarily the same as selling the corporation name.

If you and your client is only concerned about what income the asset sale generates than I would agree with your conclusion in the original post.

[oceanlovin'ea]

I am thinking this man doesn't know if the business has stock or not. Although the balance sheet does show a nice capital stock balance in addition to a paid in capital balance.

I just started doing this return last year. I am not sure that I totally trust the figures that came forward. He started the business in 2004.

So maybe he sells the brand name and the goodwill. Then he closes the business and distributes the remaining assets to himself as the sole shareholder. Am I on the right track, Gretel?

Linda, EA

[Gretel]

Yep, this makes sense. You probably know that he cannot just distribute the assets to him, that will be a taxable event.

[JoshinNC]

If its a Corp, S or C, it has stock

I am thinking this man doesn't know if the business has stock or not. Although the balance sheet does show a nice capital stock balance in addition to a paid in capital balance.

I just started doing this return last year. I am not sure that I totally trust the figures that came forward. He started the business in 2004.

So maybe he sells the brand name and the goodwill. Then he closes the business and distributes the remaining assets to himself as the sole shareholder. Am I on the right track, Gretel?

Linda, EA

The sale of the dba and goodwill would be sale of Section 197 intangibles. The shareholder would keep all other assets of the Corp and could do as he pleased, including selling those assets to someone else, starting another biz or distributing them, within the bounds of any non-compete ancillary to the asset purchase of course.

[dsi]

If you haven't already done so, you need to get a copy of his articles, filings with the state, stock certificate, minutes (if any). Also, look on the balance sheet of his 1120S to see how much $$$ is in "Stock"