

Ask HN: Opinions on proper business structure for sale? - mambajamba

I am posting outside my regular account to get an opinion on a sensitive matter.  Short background:  I started with a small web app for fun 8 years ago as a side project.  It has grown into a pretty nice sized business that I run full-time and it's till growing rapidly (and spinning off other related web apps).<p>I finally decided that it was time to become a "real" company and ended up creating an S-Corp as the operating company and an LLC to hold all the intellectual property (trademarks and copyrights to source code mainly).<p>In finishing up the paperwork, I had to meet a new attorney and when I looked at my situation, he thought there was a good chance that somewhere down the road, I would have the opportunity to sell the entire business for a big payday.  I currently own 100% of the company and don't need angel/venture investors as it's generating good cash flow on it's own....but I might want to exit someday.<p>He tried to explain to me that I would want to structure things so that a "Stock Sale" would be attractive and so that I could avoid trying to need to do an "Asset Sale"  He also wondered what Business structure would offer the best tax situation if a sale came to pass.<p>I'm sorry to ramble on but here are the questions:<p>1. Does anyone with more experience in these matters understand if a different business model would be advantages tax wise in selling the whole company for stock?<p>2.  Would a different business model make a stock sale more attractive?<p>Thanks for ANY guidance/help you can provide.<p>PS - I've asked my CPA and HE can't imagine why anything other than an LLC or S-Corp would have any advantages, but admitted he's not put a lot of business sale deals together.  Also - the business could easily "merge" at any point into a single entity by having the S-corp purchase the LLC (to create one s-corp) OR by disbanding the S-corp and having the LLC take over all operations (to have 1 LLC)<p>Thanks again
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grellas
A business owned by a corporation can be sold via asset sale, stock sale, or
merger.

A C-corp runs into trouble in selling all or substantially of its assets
because this can trigger a severe double tax if those assets carry with them a
low basis (as IP usually does).

The way to avoid the double-tax problem is to structure the deal as a stock
sale instead, in which case the shareholders get a one-time capital gain on
the sale. The problem is that your buyer normally won't want to do this, or at
least will demand a severe price discount for doing a stock sale in that
scenario.

An S-corp avoids the double-tax problem, however, eliminating the need for a
stock sale in this case. Since this is what you have, an asset sale would work
fine, in all likelihood.

Similarly with the sale of assets from an LLC (at least any LLC that is taxed
as a partnership). This too is a tax flow-through entity and no double tax
issue would arise.

This is likely the perspective your CPA is taking and why he can't imagine why
you would want to alter your structure.

What your attorney likely has in mind is positioning for the possibility of an
"A," "B," or "C" reorganization under Internal Revenue Code 368(a)(1)(A),
368(a)(1)(B), or 368(a)(1)(C).

In an A reorganization, the target corporation merges into an acquiring
corporation with the former shareholders in the target corporation receiving
the merger consideration in exchange for their stock.

In a B reorganization, an acquiring corporation acquires stock of the target
corporation directly from the shareholders solely in exchange for voting stock
of the acquiring corporation.

In a C reorganization, an acquiring corporation acquires substantially all the
assets of the target corporation solely in exchange for voting stock of the
acquiring corporation transferred to the target corporation.

Each of these, if properly done, is _tax-free_.

In most cases, such a deal would make sense for someone selling your type of
business if the acquiring corporation were a public company.

I can only guess but, I believe, such a deal would likely not be clean if the
great part of the value being transferred consisted of IP owned by a separate
LLC. In other words, its tax-free aspect would be compromised or destroyed.

The issue would seem to be whether you should be keeping your IP in a separate
LLC or bringing it into the S-Corp now as a positioning move for potential
future acquisition options.

Can't give legal advice in this type of forum but I would think this should
point you in the general direction of issues needing to be explored. Check
with your tax professionals for particulars.

~~~
mambajamba
Thank you so much for the advice that does help.

The scenario the attorney was actually thinking about was someone handing me a
"big check" for all of it - ie all cash deal. I'm not sure from what you
wrote, but you seem to indicate that in a cash deal a C-Corp would make a
stock sale more attractive and S-corp/LLC would likely be the same and end up
with the buyer pushing for an asset sale.

BTW - the IP assets are being kept out of the S-corp intentionally to avoid a
possible tax bill later if the S-corp needs to be disbanded. (But there are
tax advantages in the PRESENT for operating as an S-Corp).

