Sale of Corporation: Everything You Need to Know
A sale of corporation can take many forms, including asset sales and stock sales. The type of sale will depend on your goal.3 min read
A sale of corporation can take many forms, including asset sales and stock sales. The type of sale will depend on your goal. With an asset sale, for instance, you are selling everything that your business owns. During a stock sale, you are only selling the shares of your company.
Asset Sale Process
An asset sale means that you are planning to sell all of your business's assets. Asset sales can involve both tangible and intangible assets. Tangible assets would be physical property owned by your business:
- Buildings and equipment.
- Cash, inventory, and investments.
Intangible assets cover less concrete possessions:
- Customer lists.
- Your business's goodwill.
Business entities that have not incorporated, such as partnerships and sole proprietorships, can only be sold via an asset sale, as they do not have stocks. Calculating a selling price for your business requires appraising your individual assets and then adding these values together.
While appraising your assets may sound simple, it can quickly become complicated, especially if a large number of your assets are intangible. For example, calculating the actual value of your business's goodwill is almost impossible. When selling your business via an asset sale, it's best to get help appraising your assets from a professional.
During an asset sale, one of the main goals of the buyer will be to reduce their tax burden. The best way to do this is by providing rapidly depreciable assets with a higher value and slowly amortizing assets with a lower value. Using this method will improve the cash flow of the company directly after the sale, as well as reducing taxes.
Buyers usually prefer asset sales over share sales because an asset sale the buyer to avoid taking on some liabilities. Asset sales aren't without their drawbacks from the standpoint of the buyer. Some types of assets, for instance, can be very difficult to sell, especially if the consent of a third-party is required.
An asset sale can be very disadvantageous from the seller's viewpoint, mostly because these sales can result in high taxes. While intangible assets will be subject to the capital gains tax, tangible assets get taxed at the income tax rate. The income tax rate that applies to the sale will depend on the tax bracket of the seller, and if a C corporation is up for sale, double taxation will apply.
How a Share Sale Works
Depending on the type of entity being sold, it's possible to use a share sale, or stock sale. Share sells are much simpler than asset sales, as the stocks of the company are the only thing being sold. Share sales are very beneficial to the seller, as the buyer will take on all of the corporation's liabilities. Once the share sale is complete, the seller is completely free from the business. Share sales can also be very beneficial from a tax perspective.
The only requirement for a share sale is that you must have incorporated your business. If you're interested in selling your business through a share sale but have structured as a partnership or sole proprietorship, you would need to restructure as a corporation before a share sale could take place.
When a corporation is sold through a stock sale, buyers do not have the ability to step up their basis in the company's assets, meaning they cannot lower their taxes by re-depreciating assets. The asset's basis at the time the sale occurs will determine the depreciation.
Another drawback to a share sale from the buyer's standpoint is that buyers must assume more risk when buying shares than when purchasing assets. In particular, the buyer may end up assuming risk not disclosed by the seller. There are several forms of risk to which buyers can be exposed in a stock sale:
- Future lawsuits.
- OSHA violations.
- Issues with employees.
To protect themselves from these liabilities, buyers should insist that the stock purchase agreement include indemnifications and warranties. If the business for sale possesses a large number of assets that cannot be easily transferred, such as patents or copyrights, a stock sale is usually the best option. With a stock sale, the corporation retains these assets, meaning they don't need to be transferred to the person purchasing the stocks.
If you need help with a sale of corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.