Just about every time a client buys or sells a business, I am asked: “Should I structure this as an asset sale or a stock sale?”
From the seller’s perspective, it is simple. Your best results are to go with a stock sale. With a stock sale, all gain is classified as long-term capital gains, as long as you have owned your business for more than 12 months.
From the buyer’s perspective, it is totally different. – When you buy a business, you should always insist on an asset sale. There are many reasons why you would want to do this.
- The first reason is successor liability – When you purchase the stock of a company, you will inherit all the skeletons in the closet, so to speak. An example: On June 1st, you purchased stock of a company. A short time later an IRS notice is received stating that the company is being audited for the previous two years. The company is still responsible for paying any balance due from the audit, even though you did not own the stock at that time.
- With a stock sale, you do not get to re-depreciate all the assets & goodwill. If you choose to purchase as an asset sale, you get to revalue all the assets and goodwill, then depreciate them.
- Finally, with an asset sale, you get set up your own business entity and decide what type of entity works best for you! Just because the previous owner structured the business as an LLC or S-Corp, does not mean it’s the best choice for you. Your situation may be different.
Other important considerations – One very important consideration that every buyer of a Nebraska business needs to be aware of is Nebraska’s successor liability law. If the seller is behind in paying sales tax, use tax, or withholding taxes, your newly purchased business is 100% liable for those taxes. This is true even if you structure it as an asset sale. So, before you sign the dotted line on that new business, you need to check with the Nebraska Department of Revenue to make sure you are not inheriting a big problem!
If you have tax, business or financial questions, please feel free to contact our office.
NOTE: This information should not be considered as tax/legal advice. You should consult your tax/legal advisor regarding your own tax/legal situation.