When buying a business it is important to know how to organize your transaction. There are a number of different aspects that will have an influence on how your transaction will be organized. Whatever way you chose will influence operations, documentations, tax issues and other legal matters. Organizing a transaction can be done so the purchase's gain or loss is subject to immediate tax, called taxable acquisitions. It can also be done so that the purchase's gain or loss is deferred, called non-taxable acquisitions.

Taxable Acquisitions Explained

Buying a partnership business or a sole proprietorship will cause the transaction to be organized as an asset acquisition. Most business run as corporations, though, so the acquisition in question may have many widely categorized forms. These may include: Mergers, consolidations, asset purchases or stock purchases, among others.

There are two different corporate acquisitions that can have instant taxation that the seller is responsible for. There may also be an inability to defer any loss or gain that results from the transaction. Small to medium sized businesses will typically be at risk for this. It would involve asset sales and purchases or sales and purchases of corporate stock.

Understanding the Sale of Assets

By making an acquisition of an asset, the buyer acquires all, or sometimes specific, resources of the entity being sold and may also be at risk of taking over the business's liabilities. Asset purchases may be popular for many due to a few different reasons: tax considerations, the ability to decide what specific items they do and don't want, and the possibility of assuming debt's and liabilities from the seller. When this type of transaction takes place, it is done so to lower a buyer's exposure to any type of liabilities, either contingent or those that are unknown. That doesn't mean, however, that certain liabilities still might be the buyer's responsibility.

Purchasers typically prefer to make asset purchases, but there are some instances when finding an alternative is a more manageable solution. For instance, there may be trademarks, leases, licenses, or other difficult or un-assignable contracts to deal with. In this case, it would be better to buy corporate stock; however, it is worthwhile to be careful in this situation if more complicated leases, contracts or franchise arrangement cause a variation in stock ownership, since this can bring about an exclusion on the transfer. If this happens, a transaction approval may become necessary, even for those buying corporate stock.

The correct documents need to be drawn up when purchasing assets to facilitate a successful transfer of the title to whatever assets are in the process of being moved. This may involve a lot of paperwork and approval or consent from the different parties involved.

Buyers and sellers alike must abide by specific corporate formalities when they engage in an asset acquisition. The corporation's board of directors is typically involved, and the majority of them usually need to approve the transaction. But first the corporation that is being acquired needs to be approved by the board of directors; only then can it be presented to the shareholders for final approval.

Organizing a purchase as an asset acquisition has many advantages. One advantage is that the buyer may exclude the seller's debts and other obligations. Liability can not always be avoided, even if there was a previous agreement between seller and buyer. One instance is if a buyer makes a direct payment to the shareholders of the company that is selling the asset. Creditors could than dispute that the company had divested their assets, which could have been paid to creditors instead.

Also, there are situations where acquired assets may be composed of the stock from the purchasing corporation, which will then be divided among stockholders when the company dissolves. In this case, courts may allow creditors who have not been paid to lay claims directly for the corporation that is buying. The entity that is being acquired may be held responsible for claims, even though the transaction was organized as an asset acquisition.

In recap, asset transactions do not always mean that the buyer doesn't become responsible for the seller's debts. It is also important that those vested in the selling company retain their limited liability protection. A majority of the time, sales of assets usually precede a company's dissolution and the handing out of earnings received by the rules of the IRS Code.

Corporate Stock Sales

A buyer may seize control of a corporation when the purchase of stocks owned by shareholders of the selling company has been completed. This acquisition gives power over the acquired company to those who own stock, rather than by direct asset acquisition. Corporate and legal standing will remain the same after the acquisition is through.

Usually, buyers would rather organize the transaction as an asset acquisition, while sellers typically favor a stock purchase. There may be concerns regarding compliance with securities laws, which could affect how the buyer views the transaction choices.

A stock acquisition may be either a necessity or just preferable over an asset acquisition for the seller, and for the buyer as well. One example is when a stock transaction is better because there are favorable carryover tax aspects. If employment and insurance positions can be preserved, a stock transaction can be a wise choice for the purchaser.

A purchaser may prefer an asset acquisition because it carries a large non-tax consideration, yet it may become slammed with unknown and conditional liabilities. This problem may be helped by establishing what is known as a holdback agreement, involving funds from the company being put into an escrow account, seller-financed promissory notes compensating for payments or arrangements in the sale contract that allow full payment of the purchase amount to be delayed until certain conditions have been reached.

In most stock acquisitions, buyers may get stock from shareholders of the corporation. They may receive this in the form of cash, stock, note, property, or even a mix and match of all of these. Buyers typically try to buy all of the sellers stock that may be outstanding, however, there may be advantages to keeping a minority shareholder in the selling corporation, however. For instance, if a management employee who has been important to the corporation wants to maintain a stake in the company, it can be good to keep him on board so that a key employee remains with the company throughout the sale. This can have both financial and psychological advantages for the company and its new owners.

One of the most important rules regarding a stock purchase is to keep it simple and neat. In this case, the corporate stock within a company is being moved, which is the only thing being transferred. Thus, the drawn out process of preparing and executing documents won't be needed. Shareholders must, however, agree to the terms of selling their stock in the corporation, and no votes are required from the shareholders. There are also no dissenter or appraisal concessions that need to be taken into consideration and sales tax does not typically apply to corporate stock sales. The exception of this is in Florida, as there is currently a tax on transfers of stock.

Just because it looks easy to make a corporate stock transaction, do not assume that it is. It is wise to investigate a company fully, before the purchase, which is more in-depth than any investigation concerning an asset transfer of the same company. This is extremely important because of liabilities involved. The individual or business that is purchasing the stock may have risks to deal with through different types of liabilities, such as contingent, fixed, undisclosed, disclosed and unknown liabilities.

Personal responsibility of these liabilities will not fall on the individual or corporation getting the stock, but it still may go into tandem within the corporation, thus affecting the company's well-earned assets. As liabilities may also surface, it is best to do your homework into the corporation first. That way you will know exactly what you are getting into, and what you need to know to make the best purchase or sale.

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