When taking into account all pertinent tax ramifications, there are four basic classifications that must be considered when purchasing or selling a corporate business. These are;
1. Transferring corporate assess in exchange for cash or notes
2 .Acquiring corporate assets by use of stock
3 .Acquiring corporate stock utilizing cash or notes
4 .Acquiring the stock of a corporation utilizing the stock of the acquiring corporation.
In the 1st type of transaction, corporate assets are sold in return for cash or notes, or a combination of both from the purchaser. After the transaction the corporation is left with cash or notes , which it may use for investment purposes. This transaction usually gives rise to a taxable gain or deductible loss to the corporate entity. As an alternative solution , the sale of all the assets may be followed by the complete liquidation of the corporate entity in a tax free transaction. However there will be a taxable gain or deductible gain to the shareholders involved. Thus this type of transaction gives rise to two events; the sale of assets and the liquidation of the corporation . while the emphasis of this articles on the start-up of a business , the sale of corporate assets and the subsequent liquidation of the selling corporation would allow the purchaser to acquire the entire assets of a successful selling entity while at the same time allowing the selling shareholders at least one tax- free event in the process.
In the event that both the buyer of all the assets of a corporation and the seller agree to the terms of the sale , the purchaser obtains a basis for the assets purchased equal to the purchaser cost. Thus if any assets or inventory are purchased for an amount greater than the seller basis , the buyer would obtain a higher depreciation basis and a higher cost of goods sold.
The buyer of all the corporate assets may expedite the transaction and also negotiate a better purchase price for all the assets by making the corporate seller aware of the benefits of a complete liquidation. If a corporation distributes all of its assets in a complete liquidation within twelve months after the adoption of a plan of liquidation , no gain or loss will be recognized on the sale of property by the corporation during there twelve month period. As a result , the tax treatment for a corporation selling all of its assets and then liquidating is no different from the case where a corporation liquidates first , with the shareholders later selling the assets that were distributed to them during the twelve month liquidation period
In an assets deal , care should be taken to see that the purchaser is not made liable for any part of the seller contingent or actual debts that the purchaser did not agree to assume. When acquiring only assets , the possibility is minimal that the purchaser will become liable for any contingent liabilities that the acquiring party was unaware of at that time of the transaction. However , such unitende3d liability might arise through noncompliance with the sales Act. The purchaser in this case will have to notify each creditor within a specific time period before he takes possession of the assets or before paying for the assets . if the purchaser fails to comply with this statutory requirement, the law will create a trust consisting of the assets purchased for the benefit of the creditors of the selling corporation.
If the purchaser pays an adequate price for the assets acquired , the rights of the seller creditors will not be prejudiced. This will probably prevent the seller creditors of the selling corporation from proceeding against the purchaser. If however, the purchase price is paid directly to the shareholders of the selling corporation, the possibility always exist that the rights of the creditors will have been prejudiced since this method of payment may enable the shareholders to defraud the creditors. Thus , care should be taken to see that the purchase price is paid directly to the selling corporation only.
The second method , how to acquire corporate assets by the use of stock come this way; a purchasing corporation might elect to acquire all the assets of another corporation by utilizing its own shares. In order to make this type of transaction tax free under so called C- type reorganization requirements ,the acquiring company must issue voting stock. One troublesome point in this type of transaction is that it would result in the dilution of the voting interests of the shareholders who held stock prior to the date of the acquisition since more shares will now be outstanding. Because this result would be impossible to avoid tax -free stock deals.
The warning her is that there is hidden danger in seeking to purchase all of the selling corporation assets utilizing the purchaser stock. Conclusions in the past have been arrived at that when the purchase uses its own stock to conclude the purchase , this transaction is tantamount to a statutory merger , thereby making the purchaser automatically liable from the debts of the selling corporation. One distinct advantage of this method is that it does not require the use of the purchaser working capital.
The third method, how to acquire corporate stock utilizing cash or notes goes this way; should a stockholder of the selling corporation elect to sell his stock in the corporation to be acquired, the result will be a taxable transaction unless the proceeds of the salary equal to the adjusted basis of the seller stock.
Example in 2006 X sells his stock in Z corporation , which represents a controlling interest in the corporation for 400.000FCFA , X had acquired the stock in 2004 for 100.000FCFA , X will have a long term capital gain of 300.000FCFA.
The fourth method, how to acquire the stock of a corporation utilizing the stock of the acquiring corporation can be done this way; a corporation might use its own stock in acquiring the stock of another corporation. If done pursuant to the requirements of a B- type reorganization it will be completely tax free. This method has the advantage of avoiding the use of the acquiring corporation working capital.