|
 |
|
Simply put, a business is a collection of assets and liabilities. At any moment in time a business typically has the following assets:
This is offset by the company's liabilities, which often include the following:
The difference between these two categories (assets and liabilities) is the Owner’s Equity. And let’s hope that is a positive number!
A Business Owner who offers a business for sale is trying to sell all these assets and liabilities together, from the IRS's point of view. A Buyer may not want all of a business's assets, and may want none of the liabilities. Let’s presume Widgets, Inc. and its owner, Mr. Seller, wants to Sell. A Buyer may want to buy Widgets, Inc. for its location, but Buyer doesn’t want the widgets or even the name Widgets, Inc.
Let’s presume Buyer makes Widgets, Inc. and Mr. Seller an offer simply for the real estate. Seller may agree to just sell the location (real estate) to Buyer and not the rest of the assets. In this instance, the Seller is only selling ONE asset out of his asset bag, and keeping the rest. There would, of course, be tax consequence for both Buyer and Seller of this one asset.
Normally, however, Buyer is buying more than one single asset in the acquisition of a business, and there lies the complication of the sale. Perhaps Buyer is not only buying the real estate, but Buyer is also acquiring the Widgets, Inc. name, the widgets, the fixed assets which help create the widgets, the telephone, the good name of the business, etc. Buyer is acquiring a GROUP of assets. The tax consequences of this type of sale will be different.
Now let’s throw in another speed bump: How the business is legally structured - sole proprietorship, partnership, Limited Liability Company or corporation. Each of these has important tax consequences to both the buyer and seller.
If Seller is a partnership, limited liability Company (LLC) or sole proprietorship, Buyer may be purchasing only its assets - a store lease, inventory, customer list and so on. Buyer may not want to take over business-related liabilities, including tax debts. But sometimes it is to the Buyer’s advantage to cherry pick a liability: a low interest rate loan on the equipment, for instance. This loan can offset a part of the purchase price.
But normally Buyer is not interested in acquiring the Seller’s liabilities. Thus the purchase agreement may require the Seller to pay all debts before closing or out of escrow. Also, Lenders typically have clauses that require debts to be paid off if there is a change of ownership.
The IRS never releases the Seller from unpaid taxes when a business is transferred. Buyer normally doesn't have to worry about the seller's tax debts unless the IRS or state taxing agency has filed a tax lien against the business or the owner. But it is a good idea to include in the escrow instructions that the Seller pay off any and all debts. While it is true the Buyer is not legally responsible for these debts, it would not stop the IRS or other government agencies from performing audits or spending the Buyer's time investigating the Seller's debts.
The tax situation is more complex when the business sale is an incorporated business. There are two choices for the Buyer: simply buy certain assets out of the corporate shell, or buy the entire corporate entity by acquiring the shares of stock.
Acquiring the shares of stock means Buyer is assuming all Assets and Liabilities of the corporation. This can include unseen liabilities such as lawsuits over past actions of the corporation, or past tax liabilities not known presently to Buyer or Seller.
If Buyer only acquires certain assets of the corporation, Buyer does not assume any of the corporation's liabilities, including taxes.
Some Sellers will sell only if a Buyer takes corporation stock. There are several reasons why a Seller may insist. One, as mentioned, is to rid himself of any potential tax liabilities, since the Buyer assumes these along with the stock. But even a perfectly honest Seller may have a tax reason for selling stock instead of assets. They wish to avoid double taxation on the monetary gain of the sale of the business, for instance.
A Buyer may be interested in acquiring stock if they are a publicly traded company and have strong trading value on Wall Street. They can offer stock for stock trade which from the Buyer’s point of view is relatively cheap money. They also have corporate lawyers on staff that can fight any and all unforeseen battles of this newly acquired corporation.
But for a smaller Buyer who does not have lawyers on staff, acquiring stock is at best dicey and at worse a catastrophe. Beware of Sellers who insist on only selling the stock of their corporation.