Should I Sell Stock or Assets?

The structure of a business acquisition can have significant tax implications for the seller of a business.  Where the business is operated in the form of an “S” corporation, the corporation pays no tax on the sale of assets, any gain is allocated to the shareholders and such gain is reported on the shareholders' personal income tax returns.  The shareholders then pay tax on such gain at the capital gains rate.  So where the business is owned by an “S” corporation, there is little difference tax-wise between sale of assets or sale of stock. 

But where the seller is a “C” corporation, there can be a significant advantage to selling stock rather than assets.  When a “C” corporation sells assets, the corporation pays tax on the gain realized at the corporate income tax rate (there is no corporate capital gains rate).  The shareholders then pay tax on the same money when the sales proceeds are distributed to them as dividends.  This “double tax” effect can make the sale of assets by a “C” corporation a very costly way for the seller to structure the transaction.

On the other hand, if the shareholders of a “C” corporation sell the stock of the corporation rather than its assets, the corporation pays no tax, and the shareholders pay only capital gains tax on the sale.  This can be a very significant tax savings.  Moreover, the shareholders may also be able to exclude all or part of the gain if the stock is “qualified small business stock” under IRC Section 1202 (QSBS). 

If you want to discuss selling your business, or want to know more about the QSBS gain exclusion, please give me a call.   Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  Under IRC section 338(h)(10), the parties can elect to treat the sale of “S” corporation stock as a sale of assets for federal income tax purposes.  If you are interested in knowing more about making a section 338(h)(10) election, give me a call.  Jsenney@pselaw.com or 937-223-1130.

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