Business Organization Structures
business organization structures
Selling Your Business- Deal Structure and Taxes
The purpose of this article is to demonstrate the importance of the tax impact in the sale of your business. As an M&A intermediary and member of the IBBA, International business brokers Association, we recognize our responsibility to recommend that our clients use attorneys and tax accountants for independent advice on transactions.
As a general rule, buyers of businesses have already completed several transactions. They have a process and are surrounded by a team of experienced mergers and acquisitions professionals. Sellers on the other hand, sell a business only one time. Their “team” consists of their outside counsel who does general business law and their accountant who does their books and tax filings. It is important to note that the seller’s team may have little or no experience in a business sale transaction.
Another general rule is that a deal structure that favors a buyer from the tax perspective normally is detrimental to the seller’s tax situation and vice versa. For example, in allocating the purchase price in an asset sale, the buyer wants the fastest write-off possible. From a tax standpoint he would want to allocate as much of the transaction value to a consulting contract for the seller and equipment with a short depreciation period.
A consulting contract is taxed to the seller as earned income, generally the highest possible tax rate. The difference between the depreciated tax basis of equipment and the amount of the purchase price allocated is taxed to the seller at the seller’s ordinary income tax rate. This is generally the second highest tax rate (no FICA due on this vs. earned income). The seller would prefer to have more of the purchase price allocated to goodwill, personal goodwill, and going concern value.
The seller would be taxed at the more favorable individual capital gains rates for gains in these categories. An individual that was in the 40% income tax bracket would pay capital gains at a 20% rate. Note: an asset sale of a business will normally put a seller into the highest income tax bracket.
The buyer’s write-off period for goodwill, personal goodwill, and going concern value is fifteen years. This is far less desirable than the one or two years of expense “write-off” for a consulting agreement.
Another very important issue for tax purposes is whether the sale is a stock sale or an asset sale. Buyers generally prefer asset sales and sellers generally prefer stock sales. In an asset sale the buyer gets to take a step-up in basis for machinery and equipment. Let’s say that the seller’s depreciated value for the machinery and equipment were $600,000. FMV and purchase price allocation were $1.25 million.
Under a stock sale the buyer inherits the historical depreciation structure for write-off. In an asset sale the buyer establishes the $1.25 million (stepped up value) as his basis for depreciation and gets the advantage of bigger write-offs for tax purposes.
The seller prefers a stock sale because the entire gain is taxed at the more favorable long-term capital gains rate. For an asset sale a portion of the gains will be taxed at the less favorable income tax rates. In the example above, the seller’s tax liability for the machinery and equipment gain in an asset sale would be 40% of the $625,000 gain or $250,000. In a stock sale the tax liability for the same gain associated with the machinery and equipment is 20% of $625,000, or $125,000.
The form of the seller’s organization, for example C Corp, S Corp, or LLC are important to consider in a business sale. In a C Corp vs. an S Corp and LLC, the gains are subject to double taxation. In a C Corp sale the gain from the sale of assets is taxed at the corporate income tax rate. The remaining proceeds are distributed to the shareholders and the difference between the liquidation proceeds and the stockholder stock basis are taxed at the individual’s long-term capital gains rate.
The gains have been taxed twice reducing the individual’s after-tax proceeds. An S Corp or LLC sale results in gains being taxed only once using the tax profile of the individual stockholder.
Selling your business – tax consideration checklist:
1.Get good tax and legal counsel when you establish the initial form of your business – C Corp, S Corp, or LLC etc.
2.If you establish a C Corp, retain ownership of all appreciating assets outside of the corporation (land and buildings, patents, trademarks, franchise rights). Note: in a C Corp sale, there are no long-term capital gains tax rates only income tax rates. Long-term capital gains can only offset long-term capital losses. Personal assets sales can have favorable long-term capital gains treatment and you avoid double taxation for these assets with big gains.
3.Look first at the economics of the sales transaction and secondly at the tax structure.
4.Make sure your professional support team has deal making experience.
5.Before you take your business to the market, work with your professionals to understand your tax characteristics and how various deal structures will impact the after-tax sale proceeds
6.Before you complete your sales transaction work with a financial planning or tax planning professional to determine if there are strategies you can employ to defer or eliminate the payment of taxes.
7.Recognize that as a general rule your desire to “cash out” and receive all proceeds from your sale immediately will increase your tax liability.
8.Get your professionals involved early and keep them involved in analyzing various bids to determine your best offer.
Again, the purpose of this article was not to offer you tax advice (which I am not qualified to do). It was to alert you to the huge potential impact that the deal structure and taxes can have on the economics of your sales transaction and the importance of involving the right legal and tax professionals.
About the Author
Dave Kauppi
is a business broker and President of
MidMarket Capital
. We help business owners with all aspects of Mergers and Acquisitions.
how does the political environments affect the business organization ?
in terms of its policies structure and operations
Well when ever the business bends over the the political leaders are there to kiss there @$$ and take there money.
|
|
Legal Structures … |
|
|
Emerita Night Face Cream, 2-Ounce Jar $15.19 Revitalizing moisturizer skin care for women over 40. This deep-penetrating, multi-peptide revitalizing complex reduces the appearance of fine lines while you sleep. Gotu Kola supports the regeneration of collagen for skin firmness and elasticity. Organic Aloe, Sesame Seed Oil and Shea Butter are natural emollients. Antioxidant Vitamin E protects against skin-damaging free radicals. Apply nightly… |
|
|
Emerita Day Face Cream with SPF 15, 2-Ounce Jar $18.00 Multi-taskers unite! Protect your skin from sun while moisturizing with our SPF infused cream.Fill two needs with our perfect blend of sun protection and moisture. This daily moisturizer has all the benefits of our Day Face Creamalong with the addition of a sunscreen formula thats broad-spectrum (blocking both UVA and UVB radiation). This is not your average sunscreen. First and foremost, it lavis… |
|
|
Emerita Dark Circle Eye Serum, .5-Ounce Bottle $31.99 Reduces the appearance of fine lines, puffiness and chases dark shadows away. This proven, multi – peptide formulation smoothes while it enhances your skin’s natural firmness and elasticity. Vitamin K improves capillary strength. Natural, organic antioxidant extracts of Green and White Tea and Cucumber soothe and refresh while protecting against skin – damaging free radicals. Apply a small amount,… |
|
|
Adams Business Forms Software, White (SW2223) $16.99 Can be used to improve the organization and structure of any size business. EA…. |
|
|
Rosetta Stone Japanese Level 1-3 Set $399.00 Communicate and connect around the world. Build a foundation of fundamental vocabulary and essential language structure. Develop the language skills to enjoy social interactions such as travel and shopping and learn to share ideas and opinions in your new language. What Will I Learn This level will help you: Build your vocabulary and language abilities Spell and write accurately Speak wit… |
|
|
Rosetta Stone Portuguese (Brazil) Level 1-3 Set $399.00 Communicate and connect around the world. Build a foundation of fundamental vocabulary and essential language structure. Develop the language skills to enjoy social interactions such as travel and shopping and learn to share ideas and opinions in your new language. What Will I Learn This level will help you: Build your vocabulary and language abilities Spell and write accurately Speak wit… |
|
|
Rosetta Stone Spanish (Latin America) Level 1-3 Set $399.00 Communicate and connect around the world. Build a foundation of fundamental vocabulary and essential language structure. Develop the language skills to enjoy social interactions such as travel and shopping and learn to share ideas and opinions in your new language. What Will I Learn This level will help you: Build your vocabulary and language abilities Spell and write accurately Speak wit… |
|
|
Organization Theory and Design $147.93 Organization Theory and Design 10th Edition (International Edition) By Daft This is the student/international edition which is a softcover with a different cover image in the front. Even though the cover design and ISBN numbers is different, the content is exactly the same as the U.S. version. Key Details Author: Richard L. Daft Language: English Format: Hardcover ISBN-10: 0324598890 ISBN-13: 9780… |
|
|
Managing The Professional Service Firm $10.99 For the first time in paperback, international expert and consultant David Maister offers a brilliant and accessible guide to every management issue at play in professional firms. Professional firms differ from other business enterprises in two distinct ways: first, they provide highly customized services and thus cannot apply many of the management principles developed for product-based industri… |
|
|
Organization Structures $210.05 This book is in Used condition |
|
|
Conventions and Structures in Economic Organization $345.53 This book is in Used condition |
|
|
Design and Organization of Computing Structures $49.68 No Synopsis Available |
|
|
Business Structures $24.71 This book is in New – Excellent condition |
|
|
Business Organization $34.08 No Synopsis Available |
|
|
Business Structures, by Epstein $100 This book is in New – Excellent condition |
|
|
Structures for Strategy : The Business Plan $7.74 No Synopsis Available |
|
|
Law of Business Organization 3 $19.98 This book is in Like New condition |
|
|
Introduction to Data Structures and Computer Organization, by Stone $1.95 This book is in Used condition |
|
|
Business Principles and Organization $32.61 No Synopsis Available |
|
|
Business Organization and Combination $29.24 No Synopsis Available |
|
|
The Organization of Modern Business $30.22 No Synopsis Available |
|
|
The Organization And Management Of Business Corporations $27.25 No Synopsis Available |
|
|
The Organization and Management of Business Corporations $30.22 No Synopsis Available |
|
|
Companies and Other Business Structures 2e $78 No Synopsis Available |
|
|
Business Organization 05-06 Stat Supp $33.91 No Synopsis Available |
|
|
Geo-Business GIS in the Digital Organization $95 This book is in New – Excellent condition |
|
|
Commentaries and Cases on the Law of Business Organization $18 No Synopsis Available |
|
|
Smart Business Systems for the Optimized Organization $100.38 No Synopsis Available |
|
|
The Handbook of Small Business Organization and Management $28.27 No Synopsis Available |
|
|
Business Organization and the Myth of the Market Economy $40.95 No Synopsis Available |
|
|
Commentary On The Science Of Organization And Business Development $30.18 No Synopsis Available |
|
|
Commentary on the Science of Organization and Business Development $32.17 No Synopsis Available |
|
|
Geo-Business: GIS in the Digital Organization $112.13 No Synopsis Available |
