If you are looking to acquire a business, you can acquire the assets of the business or acquire ownership interests. The ownership interest would include stock of a corporation, membership interest in an LLC, or a partnership interest.
In most transactions, the purchaser and the seller have conflicting preferences regarding the structure of the transaction. This conflict is magnified if the entity being purchased is a C corporation. The seller will usually want to sell their stock due to the ease, tax savings and other business and legal reasons.
For the purchaser, it will typically be advantageous to acquire the assets of the business, not the existing entity structure. From a tax standpoint, significant tax and cash flow differences will exist based on how the transaction is structured.
For example, assume you are looking to purchase a C corporation that has appreciated significantly in value from its inception. However, assume the corporation's assets have little remaining tax basis and thus no depreciation available to offset taxable income in future years. If you pay $1,000,000 for the corporation's stock, you would not benefit from future depreciation as the assets in this example have already been fully written off.
If you were to buy the assets of such business for $1,000,000 rather than the stock, you would have depreciable or amortizable assets over their relative life. Assuming a 40 percent tax rate, the depreciation and amortization would account for $400,000 in additional cash flow over the life of the assets.
There is a solution for those purchasers who desire to acquire the corporation entity and still receive the tax benefits of an asset purchase. IRC Sections 336(e) and 388(h)(10) provide for a purchaser to acquire the stock of a corporation and treat it as an asset acquisition. Several requirements outlined in the code and regulations need to be followed. However, those provisions may provide for the perfect alternative.
Taxpayers too often make a business decision or structure a deal before consulting with their tax advisors. As can be seen by the issues and opportunities discussed above, as well as a multitude of other tax and non-tax issues, taxpayers should consult with their tax advisors when considering a business acquisition.