Tax Implications on the Sale of C. Corp. vs S. Corp.
If you are positioning your company to be sold, one of the major items you should be looking at is your Corporate Structure. If you are a C Corp. you are at a tax disadvantage as compared to an S Corp. The Tax Rules are complex and the tax treatment will impact the amount of money offered to a Selling Co. Briefly stated below are some of the Federal Tax nuances you should be looking at:
- If the Acquiring Co. buys the fixed assets of either a C Corp. or an S Corp. there are no differences tax wise to the Acquiring Co., however,
- the Selling Co. (if it is a C Corp.) will be forced to pay double taxes. First they will pay a corporate tax on the gain of the sale of the fixed assets,
- then when the Selling Co. shuts down, the shareholders will pay income taxes on the liquidating dividends paid out to them.
- If the Acquiring Co. acquires the stock of the Selling Co., the double taxation is avoided as the Selling Co. Shareholders will only pay individual capital gains taxes on the sale of their shares, thus avoiding the double taxation, however,
- the Acquiring Co. loses the tax deduction for the write up of the fixed assets to FMV and the Goodwill associated with the difference in the amount paid to the Selling Co. Shareholders and the FMV of the fixed assets. To offset this loss, the Acquiring Co. will reduce the amount paid to the Shareholders, thus lowering the selling price. In addition, the Acquiring Co. is taking on any contingent liabilities that the Selling Co. may have.
It should also be noted that if you elect to change from a C Corp. to an S Corp., there are significant regulations that are referred to as “Built in Gains” that are enforced for a period of five (5) to ten (10) years. These regulations impact being treated as an S Corp for tax purposes on the sale of a business or the sale of a substantial amount of the assets. As always, you should consult your tax professional on these matters.
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