Sale of Business

[peggysioux]

When selling an S-Corp, is there a way to determine which is more beneficial - sale of stock or sale of assets and liquidation of corporation? Is it basically that every situation is different and you need to research both avenues for that particular business? Is there a "rule of thumb" to go by. I have a S-Corp client that is considering selling his electrician business; but I am new at handling an S-Corp sale, so wanted to make sure I had all the facts. Any guidance would be appeciated.

[Brad Imsdahl]

The seller almost always wants to sell the stock in the business. The seller would get capital gain treatment, and any potential product or service liabilities now become the responsibility of the buyer.

The buyer almost always wants to buy the assets of the business, not the stock. The buyer gets stepped up basis of assets, as opposed to purchasing a capital asset (the stock) of which the cost cannot be deducted for tax purposes until the stock is sold. The buyer also does not want any hidden liabilities that could be unkown to both the buyer and seller at the time of sale (angry customer wants a refund, or wants to sue for something that went wrong, etc.)

Obviously, the two are at odds with each other. That is where the negotiations begin, as I think it unrealistic to expect the buyer to buy the stock. The seller then has negotiating power to up the price for the depreciation recapture, and all the other ordinary income issues associated with selling the assets of the corporation.

TTB page 25-2 has more info on the sale of a business, the planning issues, and the tax consequences.

[geekgirldany]

TTB example is very good and helped with my understanding of the sale on S-Corps.

I had a customer sale a business two years ago. Their lawyer suggested a stock sale and I told them I thought that would be right but to go to a CPA for reassurance. Their lawyer wanted them to go to one too. Well the buyer did not get a second opinion and bought the stock of the corporation from my customer. Now looking back an asset sale would have been better for the buyer and as there was not that many assets(equipment) in the business. It was mostly goodwill. I learned my lesson on that one. But they Buyer should have sought a second opinion and representation in the sale.

[Brad Imsdahl]

Your client was the seller. You wanted your client to sell the stock, not the assets. So you did your job on the deal. It was not your job to help the buyer, who was not your client. If a buyer did not know, or did not retain professional help, that was not your problem.