In concept, the easiest way to buy a business is to purchase a seller's assets, free and clear of any liabilities. The purchaser is not actually buying the business entity itself. Thus, an asset purchase is much like buying the seller's merchandise without buying the store.
As a rule of thumb, a buyer will usually prefer an asset purchase agreement. Some of the reasons why are:
- The buyer has the ability to acquire assets only, without assuming any liabilities of the seller. The buyer can also pick and choose which assets to acquire. Conversely, the seller can choose which assets to keep.
- The buyer gets a "stepped-up" tax basis on the assets being acquired.
- The buyer usually has the option, but not the obligation, to hire employees of the seller's business.
- The buyer also has the ability to pick and choose which contracts to assume.
Taxes can take a huge bite out of the money you receive for your business. It pays to know just how big that tax bite will be -- and to try to lower it if possible. But be careful: taxes can get complicated. You'll probably need help from a CPA or other tax expert.
Your tax bill will be influenced by two key factors: How your business is legally set up and -- in the case of a corporation or LLC -- whether you're selling the assets or the entity. Sales of all sole proprietorships and almost all partnerships are asset sales. So are the sales of many corporations and LLCs.
In an asset sale, you allocate the sale price to the various assets -- for example, furniture, equipment, supply contracts, the business name -- and you classify the assets in seven IRS classes, such as inventory, other tangible property, and goodwill. The gain from property in some classes is taxed at ordinary income rates. The gain from property in other classes is taxed at the long-term capital gain rate, if owned for more than a year.
The sale of small to mid-size business are generally structured as asset sales so that the buyer does not have to worry about unknown contingent liabilities.
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