Basically, there are two methods for a transfer of business ownership. Although there could be an indefinite number of details in the structure of a particular transaction, which can impact tax ramifications to both Buyer and Seller; below is a brief outline of each method.Asset Sale:
Seller keeps cash and (usually) receivables, and delivers the company to the
Buyer; usually with all previously existing company debt paid by the Seller.
Seller keeps corporate entity to later dissolve or use for new endeavor.
Seller could pay a combination of capital gains and regular income tax,
and also possibly corporate taxes, depending on C or S election.
Buyer and Seller agree to allocation of purchase price among asset
categories for filing of Form 8594 with the Internal Revenue Service.
Buyer may increase the value of fixed assets to fair market value, as
opposed to book value for depreciation, based on allocation.
Buyer avoids assuming both known and unknown liabilities of the corporation.
Usually, the Sale Price is greater than the identifiable tangible assets. This
excess is then allocated to one or more intangible assets, such as Goodwill
(depreciated over fifteen years), non-compete or others for depreciation.
Seller pays primarily capital gains tax.
Seller endorses stock certificates over to the new owner.
Buyer assumes all assets and liabilities, unless specifically excluded.
Buyer takes on the risks associated with potentially unknown liabilities.
Buyer inherits existing tax depreciation schedules for company assets.
Buyer may also inherit any tax loss carry forwards to shield future income.
There is no allocation of purchase price or goodwill related to the transaction.
Real Estate, either land and/or buildings owned by the business, does not have to be included in either transaction method. It can be retained by the Seller and leased to the Buyer, generating monthly income to the Seller. The property can be sold in the future, and usually at an appreciated price, to a real estate investor or the Buyer. Province Group does not give tax advice, but highly recommends that the reader consult with their tax advisor and use this information as a basis to discuss the impact either transaction method will have on their specific tax situation.