Selling a Business: Entity Sale vs. Asset Sale
Selling a business can be a complicated and emotional process. One of the biggest decisions you will need to make is whether to sell your business as an entity or as assets. The choice you make will have a significant impact on the taxes you will have to pay on the sale.
An entity sale involves selling the business as a whole. This means that you will sell all the shares of your corporation or membership interests of your limited liability company. This type of sale is usually simpler and quicker to execute because you do not have to go through the process of identifying and selling individual assets. However, from a tax standpoint, an entity sale may not be the most beneficial.
When you sell your business as an entity, you are not able to allocate the sale price to specific assets. This means that the entire sale price is allocated to the business as a whole. As a result, the gain on the sale is taxed at the higher corporate tax rate. Moreover, the buyers of the business may be hesitant to buy an entity, especially if there are risks associated with the company.
On the other hand, an asset sale involves selling individual assets such as equipment, inventory, real estate, and intangible assets like goodwill. This type of sale is more complex as it requires identifying and valuing each asset. However, it can be more tax-efficient. In an asset sale, the sale price can be allocated to each asset, and the gains or losses on each asset will be taxed at its respective tax rate. Additionally, the buyers may prefer to purchase assets rather than an entity because it allows them to avoid any potential liabilities or risks associated with the entity.
Whether to sell your business as an entity or as assets is a significant decision that should not be taken lightly. There are pros and cons to both types of sales, and the decision you make will significantly impact the taxes you will have to pay. It is important to consult with a qualified tax advisor to discuss the best option for your specific situation.