Sell ??your Business- Deal Structure and Taxes

sale of business
The purpose of this article is to demonstrate the importance of the tax impact in the sale of your business. As an M & amp amp ;;. An intermediate and a member of IBBA, International Business Brokers Association, we recognize our responsibility to recommend that our clients use attorneys and tax accountants for independent advice on transactions

In general, buyers companies have already completed several transactions. They have a process and are surrounded by a team of experienced professionals mergers and acquisitions. Sellers on the other hand, the sale of a business only once. Their “team” consists of their outside counsel who does general business law and their accountant who does their books and tax returns. It is important to note that the seller’s team may have little or no experience in a business sale transaction.

Another general rule is that a deal structure that favors a buyer from a tax perspective normally is detrimental to the seller of tax situation and vice versa. For example, in the allocation of the purchase price in an asset sale, the buyer wants the fastest possible radiation. From a tax point of view, he would spend much of the value of the transaction at a consulting contract for the seller and equipment with a shorter amortization period.

A consulting contract is taxed to the seller as earned income, generally the tax rate as high as possible. The difference between the depreciated tax value of the equipment and the amount of allocated purchase price to the seller is taxed at the tax rate on ordinary income of the seller. This is generally the tax rate in the second (no FICA due to this against earned income). The seller would prefer to have more of the purchase price allocated to goodwill, personal goodwill acquisition, and the value in use.

The seller would be taxed more favorable individual capital gains rates for gains in these categories. A person who was in the tax bracket on income of 40% would pay capital gains at a rate of 20%. Note:. A sale of assets of a business will normally put a seller in the highest income bracket tax

The buyer’s cancellation period for goodwill, personal goodwill and the value utility is fifteen. This is much less desirable than one or two years of spending “radiation” to a consulting agreement.

Another very important question for tax purposes is whether the sale is a sale of shares or a sale of assets. Buyers generally prefer asset sales and sellers generally prefer selling shares. In an asset sale the buyer gets to take a step-up in basis for machinery and equipment. Let’s say the depreciated value of the vendor for machinery and equipment were $ 600,000. FMV and the allocation of the purchase price were $ 1.25 million.

As part of a sale of Buyer’s shares inherits the historical depreciation structure of radiation. In a sale of the buyer’s assets establishes the $ 1.25 million (stepped up value) as his basis for depreciation and gets the advantage of larger write-offs for tax purposes.

The seller prefers a stock sale because the entire gain is taxed at more favorable long-term capital gains. For an asset sale of a portion of the earnings will be taxed less favorable tax rate. In the example above, the seller’s tax liability for the gain of machinery and equipment in an asset sale would be 40% of the gain $ 625,000 or $ 250,000. In a stock sale the tax liability for the same gain associated with machinery and equipment is 20% of $ 625,000 or $ 125,000.

The form of organization of the vendor, for example C Corp, S Corp or LLC are important to consider in a business sale. In a C Corp against an S Corp and LLC, the gains are subject to double taxation. In a C Corp sale the gain from the sale of assets is taxed at the tax rate on corporate income. The remaining proceeds are distributed to shareholders and the difference between the proceeds of the liquidation and the shareholder base of the stock is taxed at the capital gains in the long term of the individual.

The gains were taxed twice reducing after-tax proceeds from the individual. An S Corp or LLC sale results in gains taxed only once using the tax profile of the individual shareholder

Selling your business – Tax Review list :.

1. Get good tax and legal counsel when you establish the initial form of your business – C Corp, S Corp or LLC etc.

2. If you establish a C Corp, retain ownership of all assets outside enjoying the company (land and buildings, patents, trademarks, franchise rights). Note: In a C Corp sale, there are no tax rate of long-term capital gains tax rates only on income. Long-term capital gains can offset long-term capital losses. The sale of personal property may have the favorable treatment of long-term capital gains and you avoid the double taxation of these assets with big gains.

3. First look at the economy of the sales transaction and secondly at the tax structure.

4. Make sure your professional support team has many experienced.

5. Before taking your business to the market, work with your professionals to understand your tax characteristics and how various deal structures will impact after tax proceeds

6. Before closing your sales transaction work with a professional financial planning or tax planning to determine whether there are strategies you can employ to defer or eliminate paying taxes.

7. Recognize that generally your desire to “cash in” and receive all proceeds from your sale immediately will increase your tax liability.

8. Ask your professionals involved early and keep involved in the analysis of the different offers to determine the best offer.

Again, the purpose of this article was not to offer you tax advice (which I am not qualified to do so). He was to warn you of the enormous potential impact that the structure of the transaction and taxes can have on the economy of your sales transaction and the importance of involving the legal and tax professionals right.