Business Sellers – Beware of the C Corp Asset Sale

We completed the sale of a webhosting company in California.  The seller had a C corp in located in California, but most of the business customers and servers were located in Nevada.  Our client had started her company 15 years prior to the sale and had set it up as a C Corp. She never was advised to change that structure in preparation for a much better tax treatment on the sale of the business.

The buyer had an acquisition policy of only asset sales and no stock sales. The tax implications to our client were punishing. In a C Corp Asset Sale, there is no such thing as a long-term capital gain for the corporation. Since our client’s basis (a technology and consulting firm) was essentially $0, the entire sale amount was treated as ordinary income and was taxed at a rate of about 40%. Once taxes are paid by the corporation and a distribution is made to the stockholders, the stockholders are then taxed at the 35% individual long-term capital gains rate.  The client was not well served by its Attorney, had the seller simply had an S-Corp at the time then there would have been much lower tax consequences.

 

 

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