| First, unless you are planning on going public or | | | | amount allocated to the hard assets is $6 million. |
| have hundreds of stockholders do not form a C | | | | That leaves $2 million that can be classified as |
| Corp to begin with. Use an S Corp or an LLC. If | | | | good will. If that good will is assigned to the C |
| you currently are a C Corp ask your attorney or | | | | Corp, it will be taxed at the 34% rate and then |
| tax advisor about converting to an S Corp. If you | | | | taxed again when it is distributed to the |
| sell your company within a 10 year period of | | | | shareholders at 15%. |
| converting to an S Corp the sale can be taxed as | | | | If you can move that amount to personal goodwill |
| if you were still a C Corp. | | | | for the owner, it is paid directly to him and he |
| Here is what happens when there is an asset sale | | | | gets taxed at the 15% rate only. The calculation |
| of a C Corp. The assets that are sold are | | | | looks like this: If the good will is $2 million and is |
| compared to their depreciated basis and the | | | | allocated to the C Corp. They pay $680,000 in |
| difference is treated as ordinary income to the C | | | | corporate income taxes. The $1,320,000 remaining |
| Corp. Any good will is a 100% gain and again is | | | | gets distributed to the shareholders and an |
| treated as ordinary income. This new found | | | | additional 15% tax is paid or $198,000 for a total |
| income drives up your corporate tax rate, often | | | | tax on that $2 million of $878,000. Moving it all to |
| to the maximum rate of around 34%. You are | | | | personal goodwill results in a total tax on that $2 |
| not done yet. The corporation pays this tax bill | | | | million of $300,000, a savings of $578,000. This |
| and then there is a distribution of the remaining | | | | approach was pioneered in a classic IRS case |
| funds to the shareholders. They are taxed a | | | | called the Martin Ice Cream Case. |
| second time at their long term capital gains rate. | | | | There is a built in bias on the part of buyers with |
| Compare this to a C Corp stock sale. The stock | | | | the advice of their attorneys to avoid doing stock |
| is sold and there is no tax to the corporation. The | | | | sales because you buy everything including any |
| distribution is made to the shareholders and they | | | | hidden liabilities. You as the seller want to convince |
| pay only their long term capital gain on the change | | | | the buyer to do a stock sale by demonstrating |
| in value over their basis. The difference can be | | | | that there are no hidden liabilities. Another |
| hundreds of thousands of dollars. | | | | argument you can use is that most contracts are |
| Secondly, keep all assets that may appreciate in | | | | not assignable without the consent of the other |
| value outside the C Corp and in an LLC. Your real | | | | party. In an asset sale it could be problematic to |
| estate, patents, intellectual property, etc. should | | | | get assignments of a large quantity of contracts. |
| be held in a pass through entity so you avoid the | | | | An example is if your company is in a favorable |
| potential high C Corp corporate tax rate and the | | | | long-term property lease the landlord will never |
| double taxation if you do an asset sale. | | | | agree to an assignment of that lease. If you have |
| Let's say that you are a C Corp and the buyer | | | | a long-term contract with a government entity, a |
| refuses to do a stock sale. If you can get the | | | | change in ownership can trigger a contract end. In |
| buyer to move as much of the transaction value | | | | a stock sale these are not issues. |
| to a covenant not to compete, you will be much | | | | There are many variables in a business sale |
| better off. That will be taxed to you personally at | | | | negotiation. Price, Cash at close, Stock versus |
| the long term capital gains rate and not the | | | | Asset Sale, and allocation of purchase price. The |
| corporate tax rate and the gain can be spread | | | | IRS does not allow the buyer's allocation of |
| out over the non-compete period. | | | | purchase price to be different than the seller's. It |
| Another approach you can use is "Personal Good | | | | also must be noted that from a tax standpoint, |
| Will". This is where the seller's reputation, | | | | something favorable for the seller is |
| expertise, and relationships are in effect | | | | correspondingly less favorable for the buyer. An |
| separated from the assets of the company and | | | | experienced buyer will structure the deal in the |
| account for as much of the good will value as | | | | most favorable way for himself. Sellers must get |
| possible from the business. So let's say that the | | | | good advisors to help them negotiate to achieve |
| company sells for $8 million dollars and the | | | | the maximum after tax proceeds. |