For business owners, the sale of their business will likely be one of the largest events they encounter during their life. Accordingly, the business owner should take the time to understand the process with the guidance of an expert who has experience with business sales to reduce the risk and maximize profit.

1. OVERVIEW OF DEAL
STRUCTURES WHEN SELLING
A BUSINESS – PART 1 (TAX
CONSEQUENCES)
By TREVOR CROW
www.biztaxbuzz.com

2. Introduction
 For business owners, the sale of their business will likely be
one of the largest events they encounter during their life.
 Accordingly, the business owner should take the time to
understand the process with the guidance of an expert who
has experience with business sales to reduce the risk and
maximize profit.
 In this two-part series of posts, I examine the most common
types of deal structures that business owners use when
selling their businesses. Throughout this series of posts I refer
to stock generically as the representation of ownership
interests in the business, but the same concepts apply if
you’re dealing with membership interests in a LLC.

3. Introduction
 While there are many variations of deal structures
available, the vast majority of deals fall under one
of two broad categories that are addressed below:
(1) asset sales; and (2) stock sales.
 One of the main factors to consider when deciding
between an asset sale and a stock sale is the tax
consequences.

4. Asset Sales
 An asset sale results in the best tax benefit for the
buyer. In an asset sale, a buyer purchases only the
assets of the selling business that it agrees to
purchase and the price paid is allocated among
each of the purchased assets.
 Buyer’s tax basis in all the purchased assets will be
equal to the total purchase price. And the Buyer’s
basis for each asset will be the amount that the
parties agree to allocate to each of the assets
purchased (provided the allocation is reasonable).

5. Asset Sales
 In general, the Buyer will want to allocate the most
money to assets that depreciate on the shortest
depreciation schedule.
 An asset sale will benefit the buyer when taking
depreciation and will also benefit the buyer when
there is a subsequent sale of the assets purchased.

6. Asset Sales
 On the other hand, the tax consequences to the
seller in an asset sale are not as favorable.
 If the seller is a C corporation for example, then the
gain from the asset sale will be taxed at the
corporate level for federal income tax purposes,
and then the remaining cash left in the company will
be taxed to shareholders of the company when the
proceeds of the sale are distributed as dividends.

7. Asset Sales
 If the entity is an S corporation or an LLC, there will
usually be only one level of tax in an asset sale
because these entities are considered pass-through
entities for tax purposes.
 However, as explained below the tax treatment to
the seller in a stock sale is usually more beneficial
to the seller regardless of seller’s form of entity.

8. Stock Sales
 A stock sale is typically beneficial to the seller. In a
stock sale, the buyer will get a basis in the stock,
which can’t be amortized, but typically does not get
an increased basis in the purchased assets (unless
the buyer makes a Section 338(h)(10) election,
which is outside the intended scope of this post).

9. Stock Sales
 With a stock sale, the seller’s entity type doesn’t
matter because the shareholders will only be subject
to one level of taxation and typically at lower
capital gains rates.
 While the lower capital gains rates make a stock
sale beneficial to all forms of seller entities, often a
stock sale is not seriously considered as an option
unless the seller is a C corporation and subject to
the double taxation that occurs if the sale is
structured as an asset sale.