Mark Pestronk
Q: Another agency has expressed interest in acquiring mine. Which would be better for me, selling my corporation's stock to the buyer or selling its assets? One more thing I have been wondering about: When I founded my agency 30 years ago, no stock or stock certificates were ever issued. Does that prevent me from selling stock at this point?
A: There are two ways to sell a business that is a corporation: a stock sale or an asset sale. With a stock sale the owner sells his shares of stock to the buyer. With an asset sale, the corporation sells its assets to the buyer.
To decide which is better for you, you have to consider tax issues and liability issues.
Tax issues. If you sell your stock, then the gain to you personally is mostly or all long-term capital gain, taxed just as though you sold stock in the stock market. On the other hand, if you sell assets, the corporation itself has a long-term capital gain.
To advise you about which tax outcome is better, I need to know whether your corporation is classified by the IRS as an S corporation, also known as a Subchapter S corporation, or whether it is classified as a C corporation.
If it is an S, then the purchase price paid to the corporation is not taxed to the corporation but rather to you personally. So, for you, the taxation on the sale of assets is about the same as taxation on the sale of stock.
On the other hand, if you own a C corporation, then the purchase price paid to the corporation could be taxed twice: once to the corporation as a long-term capital gain; then, what's left is taxed to you as a dividend, just like your company's profits.
Although there are ways to reduce this double taxation, the C corporation owner's best bet is usually to sell stock rather than assets.
For the buyer, the payments for the stock are generally not depreciable or amortizable (i.e., deductible), just as you could not get a deduction for the price of stock that you buy in the stock market. Therefore, buyers generally do not want to do stock purchases.
Buyers usually prefer an asset sale because the buyer gets to depreciate the tangible assets and amortize the intangible assets.
For this reason, most agency sales of S corporations are asset sales.
Liability issues. If you sell your stock, the buyer takes on the debts and liabilities of the seller automatically, since the corporation stays in place unchanged. With an asset purchase, the buyer can generally decide which debts and obligations to assume and which not to assume.
The ability to pick and choose is another reason buyers usually opt for asset purchases.
Two caveats: These general rules are subject to exceptions depending on various facts, so you should consult a knowledgeable lawyer or a certified public accountant before choosing a stock or asset sale. Also, state tax issues may be different from federal tax issues and may affect your decision.
Don't worry if you don't have stock certificates. Your lawyer can generate them before the sale.