Tax Considerations in
Buying or Selling a Business

Updated April 2011

The after-tax consequences of selling a business can vary significantly depending on the tax classification of the entity conducting the business (referred to in this outline as the “Company”) and on how the sale is structured. Often, what is good for one party to the sale is bad for the other. The structure of the sale, therefore, is often driven by the relative bargaining positions of the parties and, in any event, may affect the price paid by the purchaser.

Article Outline

I. General Tax Consequences

a. Corporation

1. Stock Sale

A. Form of Stock Sale

2. Asset Sale

A. Form of Asset Sale

B. Purchase Price Allocation

3. Stock Sale Treated as Asset Sale

4. Reorganization

b. Partnership

1. Equity Interest Sale

2. Asset Sale

c. Suspended Losses

II. Deferred or Contingent Payments

a. Original Issue Discount

1. Contingent Payments

b. Installment Method

1. Contingent Payments

2. Escrow and Security Arrangements

3. Ineligible Income

4. Section 453A Interest Charge

5. S Corporations and Sections 453(h) and 453B(h)

6. Section 338(h)(10) Elections and Notes

7. Distribution of Installment Obligation by Partnership

c. Reorganization

III. Employees and Other Service Providers

a. Outstanding Options and Restricted Equity

1. Optionholders

A. New Option

B. Cash or property

2. Restricted Equityholders

b. Golden Parachutes

1. Accelerated Vesting

2. Shareholder Approval

c. Covenants Not to Compete; Consulting and Employment Arrangements

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Tax Considerations in Buying or Selling a Business
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For more information, please contact the author Chip Wry.

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