Buying a Business
For legal as well as tax reasons, acquisition of business interests through the outright purchase of corporate stock may not be the most appropriate alternative. A stock purchase carries with it all of the attributes of the corporation being purchased including corporate liabilities (asserted and unasserted) and corporate tax attributes including historical basis, depreciation methods, earnings and profits, and liability for unpaid taxes. Although net operating losses of an acquired corporation remain, the new owners' ability to use those losses against future income may be severely limited. Even when the purchase of stock is the only alternative, closely held corporations are typically subject to buy-sell agreements among the shareholders that limit or prohibit the disposition of a shareholder's stock without prior approval of some or all of the other shareholders. In the case of an S corporation, the number and nature of shareholders are limited and may be violated by new shareholders.
Where possible, business acquisitions may be more appropriately accomplished through acquisition of assets rather than stock. Even if it is appropriate for new owners to operate their venture in corporate form, creation of a new entity and allowing the new entity to acquire the assets of a seller will typically free the new corporation of liabilities of the seller (unless specifically assumed), and may result in new depreciable basis, choice of depreciation methods, ability to make an S election, and other "fresh start" options not otherwise available or appropriate.
An asset acquisition requires the buyer and seller to agree as to how the purchase price is to be allocated among the various assets for tax purposes. Buyer and seller typically have adversarial interests in characterizing various components of the sale as capital or ordinary income assets. While the law prescribes a procedure to be followed, buyer and seller are granted considerable latitude in applying this process. Since they are adversarial in their objectives, the agreed upon allocation will generally be accepted by the Internal Revenue Service.
Formation of a new entity to acquire all of part of a business enterprise may allow the new owners to operate as a sole proprietorship, one of various types of partnerships, or limited liability entities. Frequently, a combination of ownership types is appropriate including the use of family trusts. New entities and acquisition techniques may provide more creative opportunities for financing the acquisition including equity, new debt outside of the entity, new debt inside of the entity, leveraged buyout, and "private equity sponsored leveraged recapitalizations."
Ronnie and his associates have helped their clients in acquiring business interests in one or more forms that best serve the clients' business, personal, family, financial, and tax objectives. We can help you as well.
©2008 Ronnie C. McClure, PhD, CPA