The goal of most business owners is to sell their business upon retiring. There are two ways to sell a business, selling the assets or selling the stock. The way in which you sell your business can make a large impact on your tax liability.
In an asset sale, the seller remains the legal owner of the entity while the buyer buys the individual assets such as equipment, licenses, goodwill, customer lists, and inventory. A value is assigned to the equipment and other personal or real property, while the remaining purchase price is considered goodwill. Goodwill is also commonly referred to as “blue sky” and is considered an intangible asset and amortized/deducted over 15 years.
Normally cash is not transferred to the new owner, nor do they assume liabilities. The new owners will have to renegotiate all contracts, assets will have to be retitled, and employment agreements are not transferred.
An asset sale is more advantageous to the buyer, as the buyer will be able to depreciate or amortize most of the purchase price. However, the seller may have some ordinary income tax consequences, where a stock sale normally only involves the lowered taxed capital gains income.
Every scenario is different; therefore, this general advice cannot be applied directly to your situation and is not intended to be tax advice. If you have concerns about a business sale, it is best practice to consult with a tax professional.