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Ask HN: Opinions on proper business structure for sale?

• grellas 17y ago
  A business owned by a corporation can be sold via asset sale, stock sale, or merger. A C-corp runs into trouble in selling all or substantially of its assets because this can trigger a severe double tax if those assets carry with them a low basis (as IP usually does). The way to avoid the double-tax problem is to structure the deal as a stock sale instead, in which case the shareholders get a one-time capital gain on the sale. The problem is that your buyer normally won't want to do this, or at least will demand a severe price discount for doing a stock sale in that scenario. An S-corp avoids the double-tax problem, however, eliminating the need for a stock sale in this case. Since this is what you have, an asset sale would work fine, in all likelihood. Similarly with the sale of assets from an LLC (at least any LLC that is taxed as a partnership). This too is a tax flow-through entity and no double tax issue would arise. This is likely the perspective your CPA is taking and why he can't imagine why you would want to alter your structure. What your attorney likely has in mind is positioning for the possibility of an "A," "B," or "C" reorganization under Internal Revenue Code 368(a)(1)(A), 368(a)(1)(B), or 368(a)(1)(C). In an A reorganization, the target corporation merges into an acquiring corporation with the former shareholders in the target corporation receiving the merger consideration in exchange for their stock. In a B reorganization, an acquiring corporation acquires stock of the target corporation directly from the shareholders solely in exchange for voting stock of the acquiring corporation. In a C reorganization, an acquiring corporation acquires substantially all the assets of the target corporation solely in exchange for voting stock of the acquiring corporation transferred to the target corporation. Each of these, if properly done, is tax-free. In most cases, such a deal would make sense for someone selling your type of business if the acquiring corporation were a public company. I can only guess but, I believe, such a deal would likely not be clean if the great part of the value being transferred consisted of IP owned by a separate LLC. In other words, its tax-free aspect would be compromised or destroyed. The issue would seem to be whether you should be keeping your IP in a separate LLC or bringing it into the S-Corp now as a positioning move for potential future acquisition options. Can't give legal advice in this type of forum but I would think this should point you in the general direction of issues needing to be explored. Check with your tax professionals for particulars.
  • mambajamba 17y ago
    Thank you so much for the advice that does help. The scenario the attorney was actually thinking about was someone handing me a "big check" for all of it - ie all cash deal. I'm not sure from what you wrote, but you seem to indicate that in a cash deal a C-Corp would make a stock sale more attractive and S-corp/LLC would likely be the same and end up with the buyer pushing for an asset sale. BTW - the IP assets are being kept out of the S-corp intentionally to avoid a possible tax bill later if the S-corp needs to be disbanded. (But there are tax advantages in the PRESENT for operating as an S-Corp).