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C vs S Corp
Posted on 6/12/15 at 7:15 pm
Posted on 6/12/15 at 7:15 pm
I had a thread talking about the potential purchase of the clinic where my wife works. We got the owner to come down on his asking price into our range but now we have another hang up. He has it listed as C corp and wants us to buy it. We have been advised to not do this and set up our own S corp. Anyone with experience please way in.
2
Posted on 6/12/15 at 8:13 pm to LSUSUPERSTAR
Just based on what you are saying--I suggest you buy the assets and not the corporation and form your own LLC.
You do not want the liabilities that the corporation might have you don't know about. The owner may not even know about. If someone the clinic treated 6 months ago decides to sue it will be yours to handle. (If you do buy the C corp make sure he can prove the corporation had liability insurance for several years without lapse and request lost runs to see if there are claims unsettled.)
You do not want the liabilities that the corporation might have you don't know about. The owner may not even know about. If someone the clinic treated 6 months ago decides to sue it will be yours to handle. (If you do buy the C corp make sure he can prove the corporation had liability insurance for several years without lapse and request lost runs to see if there are claims unsettled.)
Posted on 6/12/15 at 8:17 pm to I B Freeman
That's what we are trying to do, but he keeps talking about taking a big tax hit if he didn't sell the c corp to us. We want the place but aren't willing to sell our financial future to do it.
Posted on 6/12/15 at 10:07 pm to LSUSUPERSTAR
There are ways to mitigate the problems of a stock purchase. As far as the tax issues ask your advisor(s) if a sec. 338 election would make sense. It allows a qualified stock purchaser to account for the acquisition as an asset purchase. Since you will be taking on the tax consequences of the deemed asset sale you should be able to get a price reduction for the purchase as well.
The legal issues of unknown liabilities can be addressed with an escrow arrangement withholding some of the purchase price for a specified period of time. Or you can set up the deal as a seller financed installment sale with a reduction in the installment payments for all of, or some portions of, any, or certain types of, undisclosed liabilities that were incurred but unknown at the time of the sale.
The legal issues of unknown liabilities can be addressed with an escrow arrangement withholding some of the purchase price for a specified period of time. Or you can set up the deal as a seller financed installment sale with a reduction in the installment payments for all of, or some portions of, any, or certain types of, undisclosed liabilities that were incurred but unknown at the time of the sale.
Posted on 6/13/15 at 2:44 pm to LSUSUPERSTAR
He is trying to sell the stock so the gains he has will be taxed at the capital gains rate rather than selling the assets where he would have to recapture depreciation and pay ordinary income on that depreciation and any "blue sky" you give him.
Pooblebrain is right.
I would ask your legal advisor about the liabilities and make sure he always operated properly insured. You say it is a "practice" so I suspect it is a medical business of some sort. There may be unknown liabilities that would exceed the purchase price. Whoever carried the insurance at the time of any act that resulted in a lawsuit would be liable up to the limits of the policy.
Pooblebrain is right.
I would ask your legal advisor about the liabilities and make sure he always operated properly insured. You say it is a "practice" so I suspect it is a medical business of some sort. There may be unknown liabilities that would exceed the purchase price. Whoever carried the insurance at the time of any act that resulted in a lawsuit would be liable up to the limits of the policy.
This post was edited on 6/13/15 at 2:46 pm
Posted on 6/13/15 at 8:22 pm to Poodlebrain
338 might be perfect tax wise here.
As far as liabilities the OP needs to have a conversation with the sellers malpractice carrier to determine coverage and if there are any change of control exclusions. The carrier should be responsible for any actions that occur during the coverage period I.e. Before sale.
As far as liabilities the OP needs to have a conversation with the sellers malpractice carrier to determine coverage and if there are any change of control exclusions. The carrier should be responsible for any actions that occur during the coverage period I.e. Before sale.
Posted on 6/14/15 at 7:56 pm to Poodlebrain
You wouldn't happen to be based in the DFW area?
We met with the owner today and he brought up not selling the c corp but the sell price would go up some. I'm trying to find out the tax implications with purchasing c corp vs just assets and setting up as an s corp.
We met with the owner today and he brought up not selling the c corp but the sell price would go up some. I'm trying to find out the tax implications with purchasing c corp vs just assets and setting up as an s corp.
Posted on 6/15/15 at 10:07 am to LSUSUPERSTAR
quote:
We met with the owner today and he brought up not selling the c corp but the sell price would go up some. I'm trying to find out the tax implications with purchasing c corp vs just assets and setting up as an s corp.
LOL the owner has it backward. Wasn't his original price too high, like way too high? Tell him if he wants C corp status, he needs to lower his price, no the other way around.
When you buy the assets, you can reset the cost basis of the assets, which will allow for additional depreciation and amortization deductions.
When you buy the stock of the company, you don't get to do that (unless you invoke 338).
The problem with 338 - and the reason you need to hire a CPA - is that 338 involves a deemed sale of the assets. There is a short term tax cost to 338 - and a long term tax benefit. So... someone needs to run the numbers to ensure that the present value of the long term tax benefits exceeds the short term tax costs.
If the price is right... it's almost always better for the purchaser to do a straight asset purchase rather than the machinations of 338. However... 338 is an option and, as always, everything in a sale is negotiable.
Posted on 6/15/15 at 11:02 am to LSUSUPERSTAR
quote:No, I'm in Baton Rouge.
You wouldn't happen to be based in the DFW area?
quote:You should not have too much difficulty finding a CPA firm that has mergers and acquisition experience in the DFW area. The transaction you are contemplating is life changing. You should be willing to pay for the best legal and accounting advice you can afford. They will have a desire to assist you in making the best deal possible, even if it is to walk away.
We met with the owner today and he brought up not selling the c corp but the sell price would go up some. I'm trying to find out the tax implications with purchasing c corp vs just assets and setting up as an s corp.
The CPAs you speak with will be able to advise you regarding the differences between a stock purchase, an asset purchase, or a stock purchase with a section 338 election, and how each would impact your desire to elect S-corporation status. The CPAs should also be able to apprise you of the costs for appraisals of assets and/or cost segregation studies if you go the asset purchase or section 338 method. Those should be factored into your investment decision.
Posted on 6/15/15 at 11:29 am to I B Freeman
quote:
Just based on what you are saying--I suggest you buy the assets and not the corporation and form your own LLC.
ETA: But I would also consider what Poodlebrain says.
This post was edited on 6/15/15 at 11:31 am
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