For those of you organized as a corporation and contemplating a sale of the business, you have two options: a stock sale or an asset sale. The main reason that one would choose one over the other are tax considerations.

Normally, buyers want to buy assets and sellers desire to sell the stock of the corporation. With a C corporation an asset sale will result in double taxation, the assets will be taxed on the sale and the monies coming out of the C corporation will be taxed again. In contrast, if the stock of the corporation is sold there will be one level of tax and most likely the gain to the seller will be treated as capital gain.

The reason that a buyer desires to purchase assets rather than stock is that the buyer receives a basis in the assets acquired in the amount of purchase price that is allocated to the assets. This allows the buyer to receive depreciation deductions associated with the purchase of the assets. In a stock sale the basis of the stock is stepped up to the purchase price of the shares, however, the underlying assets are transferred at the carryover basis.

In a number of sales this disparity of tax treatments can be accounted for in the purchase price of the sale. Further, in theory, one should be able to take advantage of a stock sale by adjusting the purchase price to reflect the future tax burden to the buyer. Also, in a sale of stock the IRS does permit the buyer to elect to have the transaction treated as a purchase of assets, if the buyer pays tax on the difference between each asset’s current basis and its fair market value in the year of the transfer.

As mentioned above, the sale of assets most likely will result in a double taxation to the shareholders. However, if the liquidation of the corporation can be delayed it would result in a delay in the recognition of the second layer of tax. This might be contemplated if the corporation is re-purposed to another business or possibly treated as a holding company for future investments. One area of concern in this arena is the Personal Holding Company tax, which will not be discussed in the article.

An area of planning that might be considered if there is time prior to the sale is the conversion of the C Corporation to an S Corporation which would eliminate a portion of the second level of taxation. If you go this route, be sure to get expert tax advice, and have an appraisal done at the time of the change. If this planning route is chosen it is important to take into consideration the “reasonable compensation” issues that could be associated with S Corporation shareholders.

One final area of consideration is that if you are a smaller business being purchased by a larger corporation the Internal Revenue Code has many sections dealing with various methods of reorganization. If this is applicable it could allow a deferral of any potential tax associated with the sale in the short term.