Key Takeaways

  • Selling a corporation typically occurs through an asset sale or a stock sale, each with distinct tax and legal implications.
  • Buyers tend to favor asset sales due to reduced liability, while sellers prefer stock sales for tax advantages and simplicity.
  • Proper planning includes business valuation, due diligence, regulatory compliance, and professional negotiation.
  • C corporations may face double taxation in asset sales, while S corporations can often avoid this with proper structuring.
  • Non-financial aspects like employee transition plans, contracts, and third-party approvals are essential considerations.
  • Seeking legal and tax guidance early can help ensure a smooth and compliant transaction.

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:

  • Land.
  • Buildings and equipment.
  • Cash, inventory, and investments.

Intangible assets cover less concrete possessions:

  • Customer lists.
  • Copyrights.
  • Patents.
  • 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.

Steps to Prepare for an Asset Sale

Before proceeding with an asset sale, business owners must take proactive steps to position the company for a smooth transition and optimal valuation:

  1. Valuation of Individual Assets:
    Conduct a detailed appraisal of all tangible and intangible assets. Engage professional appraisers for complex assets such as patents or trademarks.
  2. Review Contracts and Licenses:
    Identify contracts that are assignable and those that require third-party consent. This includes leases, service agreements, and vendor contracts.
  3. Resolve Outstanding Liabilities:
    Settle debts and obligations or clearly define which will transfer with the business, as many buyers will prefer a clean slate.
  4. Inventory and Asset Documentation:
    Create a comprehensive asset list including serial numbers, locations, and condition reports, which aids in buyer due diligence.
  5. Tax Planning:
    Coordinate with tax advisors to forecast capital gains versus ordinary income tax exposure, especially in the context of depreciation recapture and potential double taxation for C corporations​.

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.

Closing the Deal and Post-Sale Requirements

Once you negotiate terms and execute the sale agreement, there are critical final steps:

  • Transfer of Ownership:
    Ensure all corporate records reflect the change in ownership. This may include updating state filings or amending corporate resolutions.
  • Notify the IRS and Other Agencies:
    File IRS Form 966 (corporation dissolution or reorganization) if applicable, and update your EIN records. Notify state and local tax authorities as needed.
  • Finalize Tax Filings:
    Prepare and file the final corporate income tax return and fulfill any remaining payroll or sales tax obligations.
  • Employee and Vendor Notifications:
    Provide written notice to employees about changes, fulfill WARN Act obligations if applicable, and inform vendors of the ownership change.
  • Document Retention:
    Maintain all legal and tax records for several years after the sale in case of audits or disputes.

You can find experienced attorneys on UpCounsel who specialize in business transactions to assist with each step of the sale.

Checklist for Selling a Corporation

Whether opting for a stock or asset sale, consider the following checklist when preparing to sell your corporation:

  • Prepare up-to-date financial statements and tax returns.
  • Organize key corporate documents (e.g., bylaws, shareholder agreements).
  • Identify all business licenses, intellectual property rights, and contractual obligations.
  • Determine if board or shareholder approval is needed for the sale.
  • Create a transition plan for employees, customers, and vendors.
  • Understand regulatory obligations, such as notifying government agencies or canceling permits.
  • Engage legal and financial professionals early to avoid missteps and maximize value.

Legal and Tax Considerations in Stock Sales

In a stock sale, the buyer purchases the shares of the corporation, assuming all company assets and liabilities. This method has key implications:

  • Tax Treatment for Sellers:
    Sellers often benefit from capital gains tax rates. For shareholders of C corporations, this is particularly favorable compared to ordinary income rates in asset sales.
  • No Asset Basis Step-Up:
    Unlike asset sales, buyers do not receive a step-up in the tax basis of assets, potentially reducing future depreciation benefits​.
  • Due Diligence on Liabilities:
    Since the buyer inherits all corporate liabilities (known and unknown), thorough due diligence is critical. This includes reviewing litigation risks, compliance with regulations, and employee obligations.
  • Indemnification Clauses:
    Stock purchase agreements typically contain warranties and indemnification provisions to protect the buyer from post-sale liabilities. These may include escrows or holdbacks.
  • S Corporation Special Rules:
    In an S corporation stock sale, buyers may request a Section 338(h)(10) election to treat the sale as an asset sale for tax purposes while legally maintaining a stock sale structure​.

Frequently Asked Questions

  1. What’s the difference between a stock sale and an asset sale when I sell my corporation?
    A stock sale transfers ownership of the corporation and all its assets and liabilities, while an asset sale allows the buyer to purchase selected assets, often excluding liabilities.
  2. Do I need board or shareholder approval to sell a corporation?
    Yes, most corporate bylaws and state laws require formal board and sometimes shareholder approval before completing a sale.
  3. Can a sole proprietorship be sold like a corporation?
    No, sole proprietorships can only be sold through asset sales since they don't issue stock.
  4. What taxes do I owe when I sell my corporation?
    You may owe capital gains tax or ordinary income tax, depending on how the sale is structured. C corporations may also face double taxation on asset sales.
  5. How do I increase the value of my business before selling?
    Clean up financials, resolve outstanding liabilities, strengthen customer contracts, and document intellectual property to boost buyer confidence and valuation.

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.