Overview

The consummation of an asset sale transaction may have significant income tax consequences for both the seller and buyer. The primary income tax considerations for the seller are the determination of the amount of gain or loss recognized from the disposition of the subject property. The amount of gain or loss realized by the seller will determine the amount of income, if any, subject to tax in connection with the transaction. The characterization of the gain or loss as capital or ordinary will determine the tax rate applicable to the transaction and the amount of any deductible losses. The buyer will be concerned with the establishment of a correct initial basis for the property purchased. The basis of the property will determine the amount of depreciation deductions allowable with respect to the property and, as adjusted, will eventually be used to determine the amount of gain or loss realized by the buyer following any subsequent sale or disposition of the property.


Buying and Selling a Business

The following are factors to be taken into consideration whenever buying or selling a business:

Preliminary Stage

The parties' motivations for making the sale and purchase.
The parties' valuation of the business to be sold or purchased and examine whether additional consideration needs to be given to this matter.
The terms of any proposed broker or finder agreement.
Whether a confidentiality agreement is required to protect the parties and their trade secrets during preliminary negotiations.
The appropriate form for the business sale-asset sale, ownership interest sale, merger, etc.
The tax aspects of the transaction.
Alternative means of payment of the purchase price, such as allocation of price to covenants not to compete or consulting agreements.
The applicability of federal and state securities laws to the transaction and determine what will be required for compliance.

Due Diligence Investigation of Seller's Business

Verify that the seller is duly incorporated and in good standing in the state of its incorporation.
Verify that the seller is qualified to do business in all states in which it transacts business.
Review the articles of incorporation and bylaws of the seller and any amendments.
Review the minute book of the seller.
Review securities law filings under state and federal securities laws.
Determine the number and type of the authorized and issued shares of stock of the seller.
Determine who are the registered owners of the issued and outstanding shares.
Determine whether there are options, warrants, or other rights to acquire shares outstanding.
Review stock transfer records of the seller.
Review all agreements between the seller and its shareholders

A Partial List of Other Considerations include:

Real Property
Personal Property
Financial and Tax Information
Employment and Labor Matters
Creation and Distribution of Products or Services
Legal Compliance and Litigation Matters
Subsidiaries
Partnership and Joint Venture Agreements
Continuing Obligations
Letter of Intent
Purchase Agreement
Assets and Liabilities
Purchase Price and Payment Terms
Closing Conditions and Procedures
Covenants and Agreements
Representations and Warranties
Indemnification of the Buyer
Buyers Checklist for Compliance with California Bulk Sales Law
Defaults and Termination

Sale of Assets of Ongoing Business

Acquisition or sale of an ongoing business enterprise through the purchase and sale of all, or substantially all, of the assets used by a seller in the operation of the business. The assets of any business will typically consist of a variety of tangible and intangible property rights including real property, tangible personal property (such as inventory and trade fixtures), and intangible personal property (such as contract rights, accounts receivable, and patent and trademark rights). While the consideration in many sale of assets of transactions is cash paid by the buyer to the seller, it is also possible to structure a sale of assets to permit the buyer to deliver a promissory note or debt or equity securities as consideration. In those situations, the seller will need to evaluate the creditworthiness of the buyer, a payment is made by promissory note, or the value and liquidity of any securities of the buyer in the event that payment is made in that manner.

Acquisition of a Business Through a Corporate Merger.

A sale of assets is distinguished from the acquisition of a business through a corporate merger, reorganization, or other acquisition of an ownership interest in an existing business entity where there is no transfer of ownership in the assets owned by the acquired entity. [For discussion and forms relating to sale of assets.

Although structured as a single transaction, an asset sale is essentially a number of separate transactions involving different types of property that must each be transferred in accordance with the particular laws applicable to each separate category of property. Depending on the circumstances, the parties may be required to comply with specific statutory restrictions applicable to asset sale transactions. An asset sale may also have significant tax consequences for both buyer and seller.

Examples of Other Business Transactions:

Fictitious Business Names
Formation of Business Entities: Partnerships, Limited Partnership, Limited Liability Companies, Corporations
Sale of Assets of Proprietorship
Limited Liability Buy-Sell Agreement
License to Sell Proprietary Products Seller Assisted Marketing Plan
Disclosure Statement and Information Sheet
Buy-Sell Agreements
Franchise Agreements
Non Competition Clauses
Consultant Agreements
Assignments of Interest in Corporation, Partnership or Limited Liability Companies
Mergers and Acquisitions



Which one is right for you?

Many factors enter into this decision, including the facts of your circumstances, your desires and your goals.

Sole Proprietorship: This is the simplest form in which to conduct a business. A sole proprietorship is not a legal entity itself. Rather, the term refers to a natural person who directly owns the business and is directly responsible for its debts. Unlimited personal liability for losses: While all profits belong to the business owner, so do all losses. Thus, if the business is unprofitable, or other liabilities are incurred, the owner (sole proprietor) is personally liable therefor. I.e., the owner puts his or her entire personal assets and wealth at risk in a proprietorship. Management: The business owner (sole proprietor) has total management authority, but may act through agents or employees. (Their acts may increase the risk of personal liability, under agency and respondeat superior principles.)

General Partnership: A general partnership is a form of business entity in which two or more co-owners engage in business for profit. So long as the parties have jointly agreed to carry on a business for profit, they are general partners even though they have no specific intent to be "general partners" or have not reached agreement on how to share profits or losses.

Characteristics: A general partnership has some of the attributes of a separate legal entity: It can hold and convey legal title to real property in its own name (rather than in the names of the partners).
It can sue and be sued in the partnership name.
It continues in existence notwithstanding the "dissociation" of one or more partners (but "dissociation" may trigger buy-out rights.
But in most other important respects, a general partnership is simply a form of co-ownership by several persons; i.e., the partners together own the business assets and (except in a limited liability partnership), are personally liable for all business debts. Each general partner puts his or her entire personal resources at risk for debts and obligations of the partnership business: Each is jointly and severally liable to the partnership creditors.

Management and control: As co-owners, each general partner has equal right to participate in management and control of the business. Disagreements as to matters in the ordinary course of partnership business are decided by a majority of the partners. Disagreements over extraordinary matters and amendments to the partnership agreement require consent of all partners. (Of course, the partnership agreement may vary these "default" rules.)
No partner has the right to receive compensation for services performed for the partnership, unless the partners agree otherwise by written agreement or conduct. Unless otherwise provided in the partnership agreement, no one can be admitted as a partner without the consent of all general partners (and a majority in interest of any limited partners).

Joint ventures as partnerships: A joint venture is a general partnership, but is typically a business formed to undertake a particular transaction or project rather than one intended to continue indefinitely. Joint ventures are commonly used in real estate matters where, e.g., two or more persons or entities form a joint venture to develop a specific parcel of property.

Limited Partnership: A limited partnership is comprised of one or more "general" partners who manage the business and who are personally liable for partnership debts, and one or more "limited" partners who contribute capital and share in the profits, but who normally take no part in running the business and who incur no liability with respect to partnership obligations beyond their capital contributions. The purpose of this form of business entity is to encourage passive investors to invest in the enterprise, allowing them to reap a share of the profits if it succeeds, but without risking more than their capital contributions.

General partners' liability: Except as otherwise provided by law or agreement, the general partners of a limited partnership are subject to the same liabilities as partners of a general partnership: i.e., joint and several liability for all debts and obligations of the partnership. every general partner is an agent of the limited partnership and may thus bind the partnership in matters concerning partnership business.

Limitation on liability to limited partners: Although general partners are jointly and severally liable to third parties for tortious acts committed in the course of partnership business by other general partners, they are not liable to limited partners for another general partner's misdeeds unless they participated in the wrongdoing (through consent or otherwise) or negligently permitted it to occur. (Even so, the "innocent" general partners may be forced to share in any resulting loss to partnership capital in accordance with the allocation of profits and losses under the partnership agreement.

Liability for Partnership Debts . A limited partner is normally not liable for partnership debts (his or her liability is limited to his or her investment in the partnership). However, a limited partner who participates in control of the partnership business may be held personally liable to creditors who actually knew of such participation at the time of extending credit and who, based on the limited partner's conduct, reasonably believed the limited partner to be a general partner.

Limited Liability Company ("LLC"): A hybrid between a partnership and a corporation, a "limited liability company" ("LLC") combines the "pass-through" treatment of a partnership with the limited liability accorded corporate shareholders. Like a corporation, which can have as few as one shareholder, an LLC need have only one "member" (i.e., owner).

Separate legal entity: Like limited partnerships and corporations, an LLC is recognized as a legal entity separate and apart from its "members" (i.e., its owners).

Limited liability of members: Ordinarily, only the LLC can be held responsible for the entity's debts. Subject to narrow exceptions (below), the LLC members are not personally liable for the entity's obligations and/or liabilities and thus enjoy the same "limited liability" as corporate shareholders

LLC members' management and control . Where the articles do not provide for managers, LLC members' management and control rights are more akin to those of general partners of a general partnership than to limited partners or corporate shareholders.

Each member has the right to vote in proportion to such member's interest in the current profits of the LLC ... unless the articles of organization or operating agreement provides otherwise. Except for certain fundamental LLC matters (below), the vote of a majority in interest suffices

Corporation
Separate legal entity status, generally: A corporation is a separate legal entity existing under authority granted by state law. It has its own identity, separate and apart from the persons who created it and from its shareholders.

Broad range of powers: As a separate legal entity, a corporation has the power to act in any way permitted by the law that created it and by its own charter; e.g., to contract, to own and convey property, to sue and be sued. It is even capable of committing torts or crimes.

Limitations
1. (a) [2:37.2] Generally cannot appear in court in "pro per": Although a corporation can sue or be sued in its name, it cannot appear in court "in propria persona." Nor can it appear on its own behalf as defendant in a criminal proceeding. Except in limited circumstances (¶ 2:37.3-37.3a), the corporation must be represented by a lawyer in all cases.

A complaint improperly filed by a self-represented corporation raises a "curable defect" (the complaint is not void). As such, neither dismissal nor striking of the pro per corporation's complaint is warranted where the other party suffered no prejudice thereby. Rather, the self-represented corporation should be given a reasonable opportunity to amend its complaint to show representation by a licensed attorney ... on such terms as the court may deem just. Exception: Small claims suit: Any officer, director or employee may appear on the corporation's behalf in small claims court, or in superior court on a small claims appeal.

Liability for corporate debts: As a separate legal entity, the corporation is responsible for its own debts. Normally, the shareholders, directors or officers of the corporation are not legally responsible for corporate liabilities. If there are losses in the business, the corporation bears them to the extent of its own resources; the stockholders indirectly bear them in that the value of their stock declines more or less in proportion to such losses.

Distinguish-liability as guarantor, "alter ego" or culpable tortfeasor: However, the shareholders may be held personally liable for corporate obligations if they have personally guaranteed them or if "alter ego liability" is imposed. They may also be liable for their own tortious conduct in ordering, authorizing or participating in corporate wrongdoing.

Management and control: Normally, management and control is vested in the board of directors, elected by the shareholders of the corporation. The directors generally make policy and major decisions but do not individually represent the corporation in dealing with third persons. Rather, such dealings are conducted through officers and employees, to whom authority is delegated by the directors. The same persons may be stockholders, directors and officers of the corporation (and usually are in small corporations). Although the shareholders elect the board of directors, they do not directly control the board's activities or decisions.


Formalities: A corporation can be created only by substantial compliance with the General Corporation Law, which requires filing of articles of incorporation containing certain essential provisions, prepayment of certain fees, etc.


Duration: As a separate legal entity, the corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers or directors, or by transfer of its shares from one person to another.



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