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Time to Get Out
At some point in an owner’s business career, the time is right to sell the company and move on.  Perhaps you’re ready to retire, or take on new challenges, or simply need the cash for some other reason.  Naturally you will want to engage the services of a qualified attorney – specifically one well versed in tax law – as the manner in which you conduct the sale of your business can have far-reaching consequences from a tax liability standpoint.

What is a Stock Sale?
When you formed your business into a corporation or some other legal entity – whether a C corporation, subchapter S corporation, or even a limited liability company (LLC) – a finite number of shares were issued and distributed among the owners.  Obviously, if you are the only owner of the business, you possess and control all these shares of stock.  A buyer need only purchase enough of the shares to acquire controlling interest, although most small business owners are anxious to move on and will generally liquidate their holdings entirely.  Taking the sale price of the enterprise and dividing it by the number of shares being sold yields the price per share.  However, because shares in a corporation must always change hands for cash, any kind of financing arrangement in a stock sale must occur separately from the exchange.  This could complicate the sale, especially if the buyer cannot come to the table with the full amount of the purchase in cash.  However, stock sales are usually easier to manage because the legal structure remains unchanged when the buyer takes over.

What is an Asset Sale?
Don’t be confused by the terminology; in most cases an “asset” sale also includes the transfer of liabilities.  In this type of transaction, once the purchase price is negotiated between buyer and seller, each corporate asset is assigned a value – typically their full market value – and any remaining balance is assigned to what is called the company’s “goodwill.”

Caution – Tax Liability Ahead
The biggest reason for choosing one method of selling your business over another involves your tax liability at the conclusion of the transaction.  This is the point at which a trusted tax advisor is most welcome.  If conducting an asset sale, and depending on how your ownership was structured – subchapter S, or sole proprietorship, for example – the price you achieve in selling the business will be taxed at the individual rate.  This is known as single taxation.  However, other corporate structures provide for taxes to be levied on the business itself, and then again on the individual owners once the profits are distributed.  This is double taxation.  There are ways to mitigate this latter situation, such as through deferred compensation, a sales commission for taking the lead in conducting the sale, or even via a long-term annuity.

In a stock sale there is rarely a risk of falling into the double-tax trap, since only the shares actually held in the corporation’s name – generally known as “treasury shares” – are treated in this manner.

Beyond the Tax Issue
There are many other considerations worth noting when deciding which type of sale to conduct.  While most of the burden remains the buyer’s concern – reconciling existing employee contracts, the continuation of property leases, contractual arrangements with suppliers – understanding the buyer’s hot-button issues can make the difference between making a lucrative sale and one that barely turns a profit, or perhaps even fails to generate an offer.

The conflict at the bargaining table arises from the fact that a stock sale typically benefits the seller, while an asset sale is often the best choice for the buyer.  For example, in a stock sale, the buyer is liable for any obligations that have carried over from the previous owners.  An asset sale allows the new owner to depreciate the value of all the fixed assets in a five-, seven- or ten-year period; this can allow a buyer to recapture much of the purchase price over time.  Knowing the benefits and pitfalls of each method can help you – the seller – find the best way to structure your sale, steer the buyer in a direction that will benefit both parties, and thereby gain you the financial freedom you sought when you started your business all those years ago.

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