November 25, 2024
The sale of an operating business results in tax consequences for the seller and buyer of the business. These transactions can be structured as either a stock sale or an asset sale.
Sellers generally prefer stock sales, because this method simplifies their tax reporting and transfers corporate liabilities to the buyer, including tax liabilities.
Buyers generally prefer asset sales, because they can purchase only the assets needed for their business. Buyers typically get a stepped-up basis for the assets purchased, which increases the buyer’s depreciation expense and reduces taxable income. In a stock sale, the buyer must continue to use the seller’s less favorable depreciation schedules. Buyers are also understandably reluctant to assume the seller’s corporate liabilities, which adds more risk to the purchase.
Sales of sole proprietorships, partnerships, and LLCs taxed as partnerships should be treated as sales of assets. Sales of partnership shares (i.e., “units”) create significant tax compliance complications that most buyers prefer to avoid. The sale of a corporation is better suited to be structured as a stock sale. Large corporations may structure a transaction as a “tax-free” merger, but this is not a method that is practical for most smaller businesses.
When a sale is made to a family member, the same stock sale vs. asset sale rules apply as in sales to unrelated parties. However, family businesses might consider using the Gift Method, the Employee Stock Ownership Plan (ESOP) Method, or the Trust Method for transferring ownership. When family businesses use the Gift Method, they should pay attention to avoiding gift taxes, which could be higher than the income taxes otherwise associated with these transfers.
This summary provides a high-level overview of tax planning for the sale of a business. Businesses should consult with a tax adviser to navigate the complications of the law and obtain the most tax-effective results.
For further reading, see:
Tax Implications of Selling a Small Business
Selling LLC Interests: The Tax Consequences May Not Be What You Expected
4 Methods for Transferring Small Business Ownership to a Family Member