Tax 101: An Overview of Certain Tax and Non-Tax Issues Related To Asset Sales and Stock Sales - ABA YLD 101 Practice Series

By Matthew P. McLaughlin

If you have a client that is considering the sale of a corporation or a business, there are certain tax and non-tax issues that should be considered prior to advising the client on how to structure the deal.

Advantages of Stock Sale
There are a number of advantages, from the seller's perspective, in structuring a transaction such as a stock sale as opposed to sale of assets. Generally, the seller benefits from the following:

  1. The seller realizes and recognizes income taxed at a capital gain rate on the sale of the stock in a corporation. This general rule is subject a certain exceptions, namely when a portion of the purchase price is allocated to a covenant not to compete. In such a situation, the seller generally recognizes ordinary income and is taxed accordingly not at the preferential capital gains rate.
  2. One non-tax advantage to a stock sale is that the seller does not have to liquidate or otherwise dispose of the corporate entity. The purchaser is acquiring the corporation or other business entity and will either maintain its existence or liquidate it.

Disadvantages of a Stock Sale
There are certain disadvantages to the seller when selling stock. Such can include:

  1. From a tax perspective, the sale of stock can cause a seller to lose any net operating losses that it may have prior to the stock sale. If the seller wants to utilize these net operating losses, a stock sale would not be the recommended way to structure the transaction.
  2. There are some practical non-tax problems created by selling stock, namely when the seller is financing the transaction for the purchaser or when the seller has a desire to continue a particular line of the business. If the seller is financing the sale for the purchaser, issues can arise in the collateralization of the transaction. If the seller desires to continue a particular line of the business, an asset sale may be better way to structure the transaction or the seller will have to spin off that particular line prior to the closing of the stock sale.

Advantages of an Asset Sale
Some of the advantages from the seller's perspective when selling assets can include:

  1. The seller may wish to only sell certain assets and an asset sale affords it the opportunity to sell only what it wants to sell to the purchaser. This would be an advantage to a seller that wants to maintain and continue a line or a division of its business.
  2. If the seller is a corporation that does not have significant built in gain with respect to its assets, an asset sale may provide both parties more flexibility. A purchaser typically prefers an asset acquisition because the purchaser gets cost basis (which is generally fair market value) in the assets it is purchasing.

Disadvantages of an Asset Sale
There are certain disadvantages to the seller when selling assets. These disadvantages can include the following:

  1. There is a potential double tax problem if the seller is a corporation. When the seller sells the assets, such is a taxable transaction. When the seller distributes the proceeds from the sale as a dividend and/or liquidates, the shareholders can be taxed upon the receipt of a dividend distribution, liquidating or otherwise.
  2. A paramount disadvantage to the seller in an asset sale is that typically, the purchaser does not assume any of the seller's liabilities. Generally, the purchaser of assets of another corporation is not responsible for the liabilities and debts of the seller.

It is important to recognize that these advantages and disadvantages from the seller's perspective apply when representing the purchaser. While the issues discussed above are germane to any type of business transaction when a client desires to sell (or a purchaser desires to acquire) a business from another entity, every situation presents its own issues and difficulties. If you have a client that wants to sell or purchase another business, it is critical to staff the transaction early in the game with appropriate non-legal and legal professionals and advisors.

Such non-legal professionals and advisors can include certified public accountants, financial advisors, business brokers and insurance agents. The legal teams need to include, as applicable, individuals with experience and expertise in the following areas: real estate, labor and employment, tax, securities, antitrust/Hart-Scott-Rodino, environmental, intellectual property, regulatory, ERISA and employee benefits and litigation.

Seeing the transaction through the due diligence phase to closing can be made easier by considering some of the tax and non-tax issues discussed herein. In addition, pulling together the non-legal and legal professional team in the infancy of the transaction can certainly mitigate and even eliminate certain issues throughout the entire negotiating, document drafting and closing process.

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About the Author

Mr. McLaughlin is an associate with the Jackson, Mississippi office of Balch & Bingham LLP where he focuses his practice on advising emerging businesses and existing companies on federal and state financing incentives as well as representing clients in mergers and acquisitions. Mr. McLaughlin is admitted to practice in the State of Mississippi and is a member of the American Bar Association Sections of Business Law, Taxation and Real Property, Probate and Trust Law.

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