Buying/Selling a Business.
Buying/Selling a business in bulk. Legal issues.
I am buying a business. How should I structure the purchase?
There are occasions when a person wants to buy an entire business. How the purchase/sale gets structured has important legal and tax consequences to both buyer and seller.
A business is composed of several elements: A recognizable name (goodwill), accounts, equipment, inventory, employees, a lease or building, etc.
If the business is incorporated the seller generally wants to sell the stock rather than each individual element. This way his or her sale of the stock will be treated as a capital gain, but more importantly, the seller gets rid of any prior liabilities since the corporation, being a separate legal entity, will be responsible for any claims that might pop up, even after the sale is consummated.
If there is an audit and a tax liability, years after the sale, the corporation, and in essence, the new owner of the stock, will absorb the tax liability.
When we represent a seller of a corporation, we advise the sale of the stock. When we represent the buyer, we advise the purchase of assets. The reason for this is that when you buy the stock of a corporation, you buy all the possible negative consequences of any prior improprieties or mistakes of the seller.
Therefore, it is advisable that when you purchase a business that is incorporated, you buy the individual assets from the corporation, rather than the stock. The corporation sells you the accounts, the equipment, and the inventory. It assigns you the lease, and if desired, sells you and grants you the use of the name. The corporation receives payment and reports each item as a sale. If there is a claim for a prior period, the corporation is responsible for it, and indirectly, the seller, not the buyer.
By selling each asset rather than the stock, the seller might be at a tax disadvantage since certain tax provisions, such as ordinary income based on depreciation recapture might be involved.
Of course, the seller wants to sell the stock, transfer any liability to the buyer, and forget about the business. This is where negotiations are critical. The sales price might have to be adjusted to reflect the tax consequences of selling the assets rather than the stock.
An Agreement not to Compete, the value of the name of the business, and the value of each asset need to be negotiated.
A Notice of Intended Bulk Sale needs to be published and recorded in the office of the county recorder in the county or
counties in this state in which the tangible assets are located and,if different, in the county in which the seller is located. UCC §6105.
In addition, the IRS has some specific rules as to how to allocate the value to each asset when assets are sold in bulk. Read "Buying/Selling a business in bulk. Tax issues". (Next page.)
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