12 May Trouble Finding a Buyer for Your C-Corp Stock? Consider the ESOP
If you own a business organized as a C-corporation, you could face a wealth-draining dilemma when you try to sell. Buyers of businesses want to effect the purchase by buying all assets of the business as opposed to purchasing shares of stock from the person(s) or organization(s) that hold(s) them. This is because the asset purchase offers the buyer substantial tax benefits and liability protections compared to the stock purchase. But an asset sale throws the C-corp seller smack into the teeth of double taxation.
If you demand that the sale be effected by stock, buyers often will decline altogether or substantially reduce the price they’ll pay and require the seller to assume some ongoing liability. There are a variety of tax reduction options available to the C-corp seller, one of which is the Employee Stock Ownership Plan (ESOP). No doubt you’ve heard of it. It’s a kind of management-led leveraged buyout with major tax advantages – and it’s always a stock sale. If your business has the size, cash flow and management depth necessary and you have confidence in the future of your business, it’s the knock-it-out-of-the-park solution for the C-corp seller. Not only do you avoid double taxation, you can almost eliminate taxes.
Note: ESOP benefits are not just for C-corporations, but tax advantages of ESOP can be extra-valuable to owners of a C-corporation who face double taxation on an asset sale.