Previously, we explained how to dissolve a business properly. If you only needed one reason to do so (and there are several), it was because it limited your liability. Dissolving is not the only option for those who wish to leave their business. You can sell it. However, there are two different ways this can happen:
- Asset Sale: Buyer receives the assets and liabilities
- Stock Sale: Buyer purchases the owner’s shares
Before we go into the benefits and drawbacks of each, you should understand stock sales do not pertain to businesses that haven’t been incorporated. Most small businesses are partnerships, sole proprietorships (single owners), or LLCs. If you intend to sell a business that is either one of those, a stock sale is not an option. None of those entity choices have stock.
Selling Your Stock
Selling the stock in your business rather than its assets may be appealing to the right buyer. As a seller, a stock sale may be more valuable. The sale proceeds are subjected to a lower capital gains rate when you sell the stock rather than the assets. By selling your ownership in the company, you limit your liability.
If your business created a specific product that subsequently malfunctions after you have sold your stock in the company, you don’t want to be on the receiving end of the litigation that may follow. Your attorney oversees the transaction, and the language contained in the agreement is essential. Should there ever be a product liability lawsuit, you want the transaction agreement to limit your liability—and your attorney will advise you on what the contract says.
Selling Your Assets
There are significant tax consequences for C-corporations and S-corporations on asset sales. For sole proprietors, partnerships, and LLCs, assets sales still lend themselves to increased taxes. One of the things you should consider before selling your business is that the IRS places a capital gains tax on intangible assets.
They break it down as capital assets and non-capital assets. The former is the physical assets you own and are selling. For example, if you own a gym, the equipment is a capital asset. The trademark on the company’s name or logo is a non-capital asset. Your lawyer will be critical in overseeing the transfer of ownership of your assets.
We have an extensive history of providing legal assistance with buyouts and business valuations. To speak with a lawyer about these or other business law-related matters, contact Quantum Lex to schedule a consultation.
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