The way a Larimer County business is set up determines the entities responsible for taxes. A company’s tax structure also impacts the sale of the business, something some Colorado entrepreneurs don’t think about until a sale is under consideration.
Understandably, new business owners are concerned about immediate benefits. It’s difficult to imagine selling when you’re trying to get or stay up and running. However, advisers suggest thinking about long-term tax implications at the time of business formation.
As an attorney can explain, C corporation and Subchapter S corporation structures have distinct advantages and disadvantages. Taxes on profits for Sub-S corporations are paid by owners and investors – the corporation is not taxed. C-corporation businesses are taxed as separate entities.
Double taxation can be a burden when C-corps companies are sold. This can be a real concern for asset sale buyers and private equity investors, who are likely to prefer “flow-through” S corporations. You still have legal options, even if you already have a C-corporation, although options narrow the closer you are to a time of sale.
Sloppy recordkeeping can impact a business sale. For instance, some companies are extremely zealous about issuing stock to new hires. Tax mistakes can show up at the time of sale when company stock is given haphazardly without consulting the board of directors or an attorney.
Accounting methods and personnel must be kept up to date to avoid unpleasant surprises prior to a business sale. It’s advisable to reevaluate accounting practices regularly, particularly during periods of significant growth. Also make certain asset identification includes a fair accounting and legal protection of intellectual property.
A buyer will be looking for ways to reduce the purchase price. Don’t wait until an asset sale offer has been made. The time to speak with a corporate counselor about a possible business sale is long before the offer is on the table.
Source: Forbes, “Start Planning For The Sale Of Your Business On Day One” David King, Dec. 19, 2014