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CORPORATIONS -  Selling a going business
    When you have incorporated a business and time has gone by, the question always comes up about selling the business.

    When a business has been successful, it has attracted repeat customers.  Because of this relationship between the going business and the good customers who will keep coming back, it usually happens that the buyer wants to buy with as little disruption as possible, and certainly without actually closing the doors to any customers, except possibly for overnight or a typical weekend when they would expect it to be closed.

    The simple way to sell a business that has been incorporated and is enjoying success is for all of the owners to agree to sell all of their shares of the capital stock to the new buyer.  If the owners sell their stock, the gain on the sale is capital gain because the stock is a capital asset in the hands of the original owners or sellers.  If this approach is followed, at the closing, the seller assigns all of his or her certificates representing shares of stock over to the buyer and the directors all submit their resignations.  The new owner is then free to elect his own directors, who will in turn elect the new officers.  Likewise, the old officers also resign unless they are continuing to work for the new owner.

    The long way to sell a business that has been incorporated is for the buyer to agree to buy the assets of the corporation.  Buyers often prefer this for two reasons: first, because the consideration paid will step-up the depreciable basis in the assets sold for income tax purposes; and second, because if there are any latent claims against the old corporation, generally those claims will not follow a mere sale of the assets.

    So in a nut shell: to sell an incorporated going business you have to first decide on whether it is going to be an asset sale or a stock sale.

    The next problem for the corporate seller who sells assets is that the corporation will pay a tax on the gain on the sale; and then the shareholders will pay a gain on the distribution of the sales proceeds when the corporation is dissolved.  In this sense, the owners now have to surrender their shares in exchange for their proportion of the net proceeds and the company has to file Articles of dissolution with the Secretary of State.

    It is also implicit in all this that any creditors must be paid first before any money is paid to the shareholders for the surrender of their stock.

    It will also happen that if the assets are sold and any such assets are encumbered the supplier or lender holding the collateral security claim against the assets will insist on being paid at the closing.

    Finally, none of this should be broached to the employees until the new owner is prepared to put on his own program to encourage them to remain loyal the new owner.

This page was written on 04190.

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