Business Buying Services tells you everything you need to know about whether or not you should buy a corporation.
Business Buying Advice: Do you want to buy the seller’s corporation?
If you are looking at buying a business, and that business is located within a corporation, you may be wondering if buying the corporation stock is a good buy. What are the ins and outs of taking on a seller’s corporation? Will this result in tax benefits or not? Or will the return on investment justify the purchase?
Pros vs. Cons of Buying a Corporation
When you buy a seller’s corporation, few benefits accrue to you but there are a lot of negatives. Let’s start with the negatives.
- When you buy stock in a corporation you lose the tax benefit of depreciating your purchase price. In addition to this you are assuming of all liabilities known and unknown, and any warrantee claims that may come in after the purchase.
- It is common to find out that a seller’s corporation owes taxes that were not disclosed or known at the close of escrow. Payroll taxes, sales taxes, and income tax can show up years later and the corporation is responsible to pay them. Even accrued vacations are a liability that a buyer and seller may not even think about.
- You inherit the corporation’s workers compensation policy history–good or bad. There are too many contingent liabilities that no one is aware of when taking over a corporation.
- Taking over a corporation is also a very poor income tax move. You cannot take depreciation on the depreciable assets of the company you bought. You must continue the greatly reduced depreciation that the corporation already was taking. Only when you sell the corporation’s stock do you get the benefit of writing off the cost you paid for the stock of the corporation.
- You do not get to depreciate the goodwill you paid for the corporation over 15 years as you would it you only bought the assets of the business. That could give you a considerable depreciation deduction to use on your annual business tax return. I feel that the tax consequences alone are enough to avoid buying a seller’s corporation.
Do the Positives of Buying a Corporation Outweigh the Negatives?
Let’s now discuss why you would even consider buying the stock of the corporation when purchasing a business.
- ·The main reason is that special government licenses are in the corporation name, and you do not have to reapply in the new corporation’s name. One example would be a recycling center license. This takes time and money to acquire and you would not want to reapply under a new name.
- Another example is the auto body industry. Every shop wants a Direct Repair Program (DRP) contract with one or more insurance companies. These contracts are not transferable. In fact the contract clearly states if controlling interest transfers the DRP contract is void. Once you lose this contract it takes a minimum of six months to get it back, but most likely you will never get it back, because someone else would have been issued this contract.
- Medical testing labs receive special licenses from Medicare, Medical, and other government agencies, for example. These licenses may not be assumable or maybe they are no longer issued. You do not want to reapply under another corporation name.
Still Want to Buy the Business? Here’s What to Do
Even with these examples, it is my opinion that it is much better to apply for new licenses in your own corporation’s name as the business buyer. Borrow the seller’s corporation, if you must, only until those new licenses come through. If you decided to do this technique the seller’s corporation would not have any assets in it, at the close of escrow, except the licenses and special permits you need to transfer later. All the hard assets would be purchased in your new corporation that had been set up during the escrow period.
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