When you have
incorporated a business and time has gone by, the question always
comes up about selling the business.
When a business has been successful, it has attracted repeat
customers. Because of this relationship between the going business
and the good customers who will keep coming back, it usually happens
that the buyer wants to buy with as little disruption as possible,
and certainly without actually closing the doors to any customers,
except possibly for overnight or a typical weekend when they would
expect it to be closed.
The simple way to
sell a business that has been incorporated and is enjoying success
is for all of the owners to agree to sell all of their shares of the
capital stock to the new buyer. If the owners sell their stock, the
gain on the sale is capital gain because the stock is a capital
asset in the hands of the original owners or sellers. If this
approach is followed, at the closing, the seller assigns all of his
or her certificates representing shares of stock over to the buyer
and the directors all submit their resignations. The new owner is
then free to elect his own directors, who will in turn elect the new
officers. Likewise, the old officers also resign unless they are
continuing to work for the new owner.
The long way to sell
a business that has been incorporated is for the buyer to agree to
buy the assets of the corporation. Buyers often prefer this for two
reasons: first, because the consideration paid will step-up the
depreciable basis in the assets sold for income tax purposes; and
second, because if there are any latent claims against the old
corporation, generally those claims will not follow a mere sale of
the assets.
So in a nut shell:
to sell an incorporated going business you have to first decide on
whether it is going to be an asset sale or a stock sale.
The next problem for
the corporate seller who sells assets is that the corporation will
pay a tax on the gain on the sale; and then the shareholders will
pay a gain on the distribution of the sales proceeds when the
corporation is dissolved. In this sense, the owners now have to
surrender their shares in exchange for their proportion of the net
proceeds and the company has to file Articles of dissolution with
the Secretary of State.
It is also implicit
in all this that any creditors must be paid first before any money
is paid to the shareholders for the surrender of their stock.
It will also happen
that if the assets are sold and any such assets are encumbered the
supplier or lender holding the collateral security claim against the
assets will insist on being paid at the closing.
Finally, none of
this should be broached to the employees until the new owner is
prepared to put on his own program to encourage them to remain loyal
the new owner. This page was written on 04190.
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CORPORATIONS - Selling a going business