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June 09, 2009 at 08:00 PM
C Corp owners take note — you must understand the ramifications of the stock sale versus the asset sale. In a C Corp asset sale, the sold assets are compared to their depreciated basis and the difference is treated as ordinary income. Any good will is a 100 percent gain and again is treated as ordinary income. This new found income drives up your corporate tax rate, often to the maximum rate of around 34 percent.
You are not done yet. The corporation pays this tax bill distributes the remaining funds to the shareholders. They are taxed a second time at their long-term capital gains rate.
Compare this to a C Corp stock sale. The stock is sold and there is no tax to the corporation. The distribution is made to the shareholders and they pay only their-long term capital gain on the change in value over their basis in the stock. The difference can be hundreds of thousands of dollars.
Most buyers have it drilled into their heads by their attorneys that they should not agree to a stock sale because the buyer will inherit all of the assets and all of the liabilities of the corporation, even the scary hidden liabilities. Additionally, in an asset acquisition, buyers get to take a step up in basis of all the assets and can depreciate them at a higher amount than inheriting those assets under their current depreciation schedule.
Early in the process, communicate to the buyer your desire for a stock sale to avoid the punishing double taxation you will face with an asset sale. You could give him two purchase prices, one for a stock sale and a much higher one (30 percent higher) for an asset sale.
