We provide tax and legal representation in transactions involving the purchase and sale of businesses.
A business can be operated as an individual proprietorship, a partnership, or a corporation. If the business is a corporation, it might be a Subchapter S corporation, that is, a corporation which has elected not to be taxed upon its corporate income, but to have that income taxed directly to its shareholders.
Sale of Sole Proprietorship
- A proprietorship, for tax purposes, is not an entity separate and distinct from the individual who owns it and has no separate existence.
- The sale by an individual of a proprietorship business is the sale of the individual assets of the business. The seller will recognize and be taxed upon the gain or treat as a loss an amount based upon the difference between the
amount he receives for each individual asset of the business and his tax basis in each of these assets. - The nature of his gain or loss, capital or ordinary, will depend similarly upon each individual asset comprising the business
Sale of a Partnership Interest.
- The sale by a partner of a partnership interest is the sale of a partnership interest separate and distinct from the individual assets owned by the partnership.
- The seller will recognize and be taxed upon the gain or treat as a loss an amount based upon the difference between the amount he receives for his partnership interest and his tax basis in this interest. The gain or loss is considered gain or loss from the sale or exchange of a capital asset.
- An exception to this rule exists with respect to gain attributable to “substantially appreciated” inventory.
- The seller of a partnership interest need not be concerned with the individual assets owned by the partnership except to determine whether or not the partnership has non-income producing capital or appreciated inventory, or unless the partner has claimed an investment credit.
- Generally, the selling partner’s tax consequences will depend upon his tax basis for his partnership interest, as opposed to the tax basis of the individual assets owned by the partnership.
- Generally, a limited liability company (LLC) will be classified and treated as a
partnership.
Sale of a Corporation
A seller who wishes to sell his corporate business can:
- sell the stock in the corporation to the purchaser,
- cause the corporation to sell its assets to the purchaser, or
- cause the corporation to distribute its assets to its stockholder who then sells the assets to the purchaser. If the seller causes the corporation to sell its assets to the purchaser, he must then, if he wants the proceeds from the sale, arrange for the corporation to distribute the proceeds to him. The last two methods are less desirable since there may be a double tax, one tax at the corporate level and one tax at the individual level.
Tax is the center of sale of a valuable business. We can structure the sale by providing tax counsel or we can represent you during the entire course of the transaction including contract drafting to closing.