Can you give an asset in lieu of cash when selling a small business?
December 31, 2012 4:56 PM Subscribe
When selling a small business, can the owner accept an asset of the company in lieu of cash payment?
The company is a California S-Corp with one owner. The owner has been diagnosed with a terminal illness and would like to transfer ownership of the company to his two employees. He does not seek to turn any profit and wants to make sure that neither he, nor the new owners, take on a tax burden in the deal. The company is a consultancy and basically breaks even or turns a very small profit each year. No debt or other liabilities. The value could be estimated anywhere from $0 to $750k (which is basically the owners current salary at a 4x multiple). The company owns a vehicle that's worth about $10k. So, can a stock sale agreement basically say the car will be given as payment for the company. Also, if it makes any difference, the owner will have an employment agreement with the company as long as he is alive to offer advisory services with a salary.
The company is a California S-Corp with one owner. The owner has been diagnosed with a terminal illness and would like to transfer ownership of the company to his two employees. He does not seek to turn any profit and wants to make sure that neither he, nor the new owners, take on a tax burden in the deal. The company is a consultancy and basically breaks even or turns a very small profit each year. No debt or other liabilities. The value could be estimated anywhere from $0 to $750k (which is basically the owners current salary at a 4x multiple). The company owns a vehicle that's worth about $10k. So, can a stock sale agreement basically say the car will be given as payment for the company. Also, if it makes any difference, the owner will have an employment agreement with the company as long as he is alive to offer advisory services with a salary.
Response by poster: Thanks for the quick reply. Your couch example pretty much sums it up, actually.
Depending on what congress does in the next few days with the estate taxes, he may already be over the non-taxable threshold with his other assets already. If congress keeps the estate tax at 5 million, then gifting should not be an issue.
What about the issue of the employment contract, can that be considered payment - salary guaranteed over a period of time?
posted by miit at 5:10 PM on December 31, 2012
Depending on what congress does in the next few days with the estate taxes, he may already be over the non-taxable threshold with his other assets already. If congress keeps the estate tax at 5 million, then gifting should not be an issue.
What about the issue of the employment contract, can that be considered payment - salary guaranteed over a period of time?
posted by miit at 5:10 PM on December 31, 2012
The sale should occur at a reasonable estimate of worth, or the IRS (if it investigates) will assume tax avoidance. Absent debts, the company is worth more than its assets.
posted by zippy at 5:37 PM on December 31, 2012
posted by zippy at 5:37 PM on December 31, 2012
what he might do is use the car as payment for the two employees to pay into coming in partnership and the owner remains a silent partner while another steps forward as MD.
posted by parmanparman at 5:55 PM on December 31, 2012
posted by parmanparman at 5:55 PM on December 31, 2012
Perhaps the current owner could gift the two employees a couple thousand dollars to hire a lawyer to come up with proposed structures for the transaction and their new business entity. I understand he has distractions in his life right now, but if they're going to own and manage the entity, they should be sure it's setup sensibly.
posted by grudgebgon at 7:51 PM on December 31, 2012
posted by grudgebgon at 7:51 PM on December 31, 2012
This sounds a little like a reverse mortgage. He gives the business (house) for a stream of payments for the rest of his life. I have no idea what that means legally, but when he talks to a lawyer or accountant, he should ask.
Since he wants and expects a stream of payments, salary for the remainder of his life (recognizing he is terminally ill) he could give both employees bonus' for 2012 of stock in the company. I also think, and this obviously needs to be run by a professional with knowledge in the area, that if it is a consulting business with his name on it or he was the primary rainmaker, that its value without him could be consider almost nil. One man operations or small consultancies do not sell for a lot of money or multiples of assets unless there are strong contracts in place that guarantee a certain amount of business. THe biggest asset of the company are the people and the founder. My point is gifting it to them may not cause a material tax issue. Their basis would be low in the event they sold.
My gut says that the best way would be for the payments to be considered an earnout rather than salary up until the point he has been paid book value for the assets then the remaining payments would be a consulting salary or 1099 fee.
posted by JohnnyGunn at 11:48 PM on December 31, 2012
Since he wants and expects a stream of payments, salary for the remainder of his life (recognizing he is terminally ill) he could give both employees bonus' for 2012 of stock in the company. I also think, and this obviously needs to be run by a professional with knowledge in the area, that if it is a consulting business with his name on it or he was the primary rainmaker, that its value without him could be consider almost nil. One man operations or small consultancies do not sell for a lot of money or multiples of assets unless there are strong contracts in place that guarantee a certain amount of business. THe biggest asset of the company are the people and the founder. My point is gifting it to them may not cause a material tax issue. Their basis would be low in the event they sold.
My gut says that the best way would be for the payments to be considered an earnout rather than salary up until the point he has been paid book value for the assets then the remaining payments would be a consulting salary or 1099 fee.
posted by JohnnyGunn at 11:48 PM on December 31, 2012
I would follow grudgebgon's recommendation. A lawyer will point out (as JohnnyGunn did) that a small business that is built on the skills and talent of the original owner has little monetary value when he is selling and bowing out of the business.
posted by megatherium at 6:43 AM on January 1, 2013
posted by megatherium at 6:43 AM on January 1, 2013
The business owner really needs to talk to a lawyer or qualified CPA to figure out the right way to do this. I'm in the process of making some changes to the ownership of a business, including dividing up assets and such. Some of the tax rules are very counter intuitive. You can't just do something that sounds like it makes sense. You need to have the deal arranged by someone who understands the law.
posted by alms at 6:32 PM on January 1, 2013
posted by alms at 6:32 PM on January 1, 2013
Response by poster: Thanks to all for the feedback. I know we will need to use a lawyer and CPA for the transaction, but I'm trying to do as much leg work as possible to make the process easier.
It looks like congress made the deal and kept the estate tax limit at $5 million, so gifting the shares appears to be the most likely scenario now.
posted by miit at 9:26 PM on January 1, 2013
It looks like congress made the deal and kept the estate tax limit at $5 million, so gifting the shares appears to be the most likely scenario now.
posted by miit at 9:26 PM on January 1, 2013
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I'm not following this. I think you are saying:
X owns S Corp 100%.
S Corp owns car (and other assets)
A&B want to buy Corp from X.
The payment from A&B to X will be the car which X, through S Corp already owns.
I think you are saying that you'll sell me your house if I give you your couch as payment. That doesn't work.
Maybe I'm not understanding.
However, if I AM understanding you correctly then, assuming X is below the taxable estate threshold why not GIFT the company to A&B - if X doesn't want profit then gift may be the easiest way to go.
posted by BrooksCooper at 5:03 PM on December 31, 2012