Tax if selling a business for Equity

Discussion in 'Accounting and Taxes' started by chaseon, Nov 8, 2010.

  1. chaseon

    chaseon
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    All-

    I am in the process of incorporating a company that will be sold next year in return for equity in an existing business.

    My question is, will I pay tax on the value of the equity that I receive (not a publicly traded company) at the time of the transaction or at the time of final liquidation?

    Thanks in advance for your help-

    Best,

    Chase
     
  2. Kay

    Kay
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    Hi chaseon and welcome to Business Advice Forum. :) Thanks for posting your question. Could you clarify where your business is located please so we know which country's laws it will come under?
     
  3. Fergal

    Fergal
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    Welcome to our business forum Chase. That's quite a technical question and it would be worth having a chat with an accountant about it.

    If you don't have an accountant already, ask friends and family to recommend for a good local one and set up an appointment to meet them. Most accountants won't charge for an initial consultation and in addition to helping to get an answer to your question you will have made a good contact that could be very helpful as your business grows and develops.
     
  4. ArcSine

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    As Fergal noted, you will want a tax pro's counsel on this one. The tax law that governs the sale / acquisition transactions such as you've described is complex. Within that complexity hide a number of lucrative tax-saving opportunities, as well as nasty surprises for the uninformed.

    Touching on your question, in the US an equity-swap acquisition (e.g., stock for stock) can frequently achieve tax-deferred status, if structured properly. If your transaction so qualifies (and to the extent that it does--a transaction might be partially taxable and partially tax-deferred), the inherent gain in your relinquished stock will not be recognized with the transaction, but rather later when you dispose of your holding in the acquiror's stock.

    Nevertheless, in any deal of this type there are 101 wrinkles and nuances that all have to be managed and dealt with in the structure, in order to hit your tax goals. A tax advisor with expertise in biz sales / acquisitions will be coin well spent.

    As further motivation for renting some brains on this one, note that the transferor (you) and the transferee (the acquiror) frequently have opposite interests in the structuring of a deal, at least for some of the various deal points. In other words, one type of arrangement might be better for your tax picture, whereas a different arrangement might produce better tax results for the other party (at your expense). You'll want an experienced advisor at your elbow making sure your interests are protected, since the resolution frequently comes down to compromises in the negotiations.
     
  5. Henry_Jakson

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    According to the IRS, tax-deferred reorganizations must have continuity of ownership and continuity of the business. This continuity exists if at least half of the equity in the target company is acquired in exchange for stock of the acquiring company.
     

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