I was speaking with a business owner recently about selling his business. During the conversation, he told me his accountant told him he could not sell his business because it was a C-Corp. I have a feeling he misunderstood his accountant's statement. Nevertheless, it opened up an interesting dialogue regarding some of the difficulties in selling corporations in general and more specifically C-Corps.
Most small business buyers are told by the accountants and by their attorneys not to purchase the corporation but rather to purchase only the assets of the corporation. This is generally sound advice. However, there are situations where the corporation needs to be purchased in order to maintain the revenue stream to the corporation. For example, a business that derives 60% of its revenue from government contracts that are with the corporation may have a severe disruption in cash flow if the business was sold under an asset sale because the government contracts may not be assignable. Another example arises in the medical sector where a corporation has a medicare billing number which would not transfer under an asset sale but remains with the corporation when the corporation is purchased.
So how do you buy a corporation? You simply purchase 100% of the outstanding shares of stock of the corporation. Instead of buying the business under an Asset Purchase Agreement, you use a Stock Purchase Agreement. Instead of the seller being the corporation, the seller(s) are the shareholders.
When a small business buyer buys a corporation (purchases the stock), they inherit all corporate liabilities, both known and unknown. While known liabilities can be quantified and the risk assessed, it is the unknown and/or undisclosed liabilities that can come back to haunt the buyer. That is why attorneys generally advise against buying the corporate stock in favor of purchasing only the assets of the corporation. However, there are ways to mitigate associated risk to the buyer and transaction attorneys are well versed in doing so.
With respect to selling the assets of a C-Corp, the C-Corp is taxed on the revenue derived from the sale of the assets and then the shareholders are taxed on the distributions, thus the "double-taxation" that people refer to when discussing pitfalls of a C-Corp. There are ways to mitigate the tax liability and a knowledgeable CPA consulted prior to the business sale can suggest a transaction structure that will be beneficial to the seller without creating substantial costs to the buyer. For example, in the sale of an insurance company that is a C-Corp, the transaction could be structured under two agreements so that the assets of the company are being sold under one agreement and personal good will is sold under a second agreement. The sale of personal good will would not be taxable to the corporation which would largely alleviate the double-taxation issue.
So, regardless of whether your business is a sole-proprietorship, partnership, C-Corp, S-Corp, LLC, or any other business entity, if it is generating revenue and has value, it can be sold when you're ready to move on to the next chapter in your life.