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