Selling a Business in California: Minimizing Taxes, Maximizing Profits, Avoiding Future Liabilities

Skilled, experienced help with all aspects of selling a business
      - by experienced San Diego business Attorneys

San Diego Law Firm can help you with the sale of your business.  If you're planning ahead, we can help you structure your business to improve its salability, make it easier to transfer, and reduce your taxes on sale.  If you're ready to sell now, we can advise and assist you in structuring the sale to maximize your sale proceeds and minimize your tax burden. 

Getting Ready Now for a Sale Later

It's never too soon to get your business in good shape for a sale.  If you become disabled, decide to retire early, or your market opportunities begin changing, having a business that can be sold on short notice will give you a strong financial advantage.  (If you plan to sell to a co-owner or transfer your business to a family member, please see our website page on Succession Planning.)  Once your business is structured for ease of sale, little additional legal work is required to keep it that way. Important aspects of planning now for a later sale include:

Form of the business. In general, the greatest tax savings in selling a business exist where the business has been organized as a “Subchapter S” corporation.  A “Subchapter C” corporation can be converted to a Sub-S corporation, but the timing of the conversion will affect the tax advantages.  San Diego Law Firm handles all aspects of Subchapter S incorporation and conversion of Sub-C to Sub-S status.   

Commercial lease. Most commercial leases contain terms that forbid you to transfer the lease to anyone else.  That makes it important to negotiate with the landlord when the lease is signed or renewed for permission to substitute a buyer of your business in place of yourself.  The landlord will probably require some security in return.  We can help you with these negotiations so that your commercial lease contains provisions that will work to your benefit when you are ready to sell your business.

Maximizing earnings. Predictable earnings and cash flow are signals that potential buyers will zero in on, and will provide you with leverage so you can secure a more favorable purchase price for your business.  As such, actively working to increase your business's earnings is key.  Potential buyers and lenders will also want to see that you've kept complete and orderly accounting records, and that your business expense deductions didn't include too many perks.

Selling Your Business

Selling a business involves financial, tax, and future legal liability considerations.  San Diego Law Firm can help you with all of these.  We offer skilled guidance and help with the negotiation and structure of the sale, and prepare all necessary sale documents.  Some of the important aspects of a sale we can assist with include:

1.   General terms of the sale

Before you begin negotiating a deal, we will counsel you on the need to evaluate important matters that will affect the entire sale, such as timing, tax consequences, price, which assets will be sold, whether you will be involved in the business after its sale, and if you will be selling stock or assets.  Our experienced and knowledgeable attorneys will prepare and review agreements as negotiations progress to make sure you're protected and that the terms of the deal promote your financial well-being.

2.   Financing for the sale

When selling your business, you don't want to miss opportunities with other potential buyers or waste time, which is why early negotiations should identify whether the buyer will have the money to make the purchase at the closing.  Resolving this issue often involves a combination of lender financing as well as financing on your part, e.g., by letting the buyer pay you at least part of the purchase price in installments.  We will advise you on advantages and disadvantages to seller financing, how to minimize risk to yourself, and you will also want to decide how much of the purchase price must be paid at the closing .

3.   Legal form of your business at the time of sale

The legal form of your business will have important financial and tax implications when your business is sold.

A. Selling a Partnership, LLC, or Sole Proprietorship.

If the business is organized as a partnership, LLC, or sole proprietorship, your sale will be structured as an “asset sale” and you will be taxed on your profit, which will be calculated using the values of each of asset or set of assets separately.  As a result, your sales agreement needs to identify how the purchase price is divided among the individual assets sold.  Not all assets are taxable at the lower capital gains rates.  That's why we will make sure that your deal doesn't overlook allocation issues since purchase price allocation can minimize your tax consequences when carefully planned and negotiated.  Your asset sale should be strategic, and may involve selling unproductive assets before the business sale, or you might retain certain assets for yourself or to lease to the buyer or others. 

We will also make sure you're informed about continuing liabilities you have in the assets sold and how your liability can be minimized by agreement.  An asset sale will require extensive documentation that must be delivered at the closing to make sure the transfer is complete, with necessary documents ranging from assignment of contracts agreements to vehicle title certificates. 

B. Selling a Sub-S Corporation.

If a business is organized as a Sub-S corporation (either originally, or for more than ten years after conversion from a C corporation), then you can elect to have stock treated as assets.  This can boost your business's value and make the sale feasible for the buyer, who is entitled to take a stepped-up basis.  You'll likely pay taxes only on your individual return, with the benefit of lower capital gains rates.  Frequently, this avoids double taxation at both corporate and your individual income tax levels, which means that the S corporation pays no federal taxes when it sells its assets.

C. Selling a C-Corporation.

If a business is organized as a C corporation, you will have the option of selling either your stock in the business or its assets.  Although both methods accomplish the same general objective, we will advise you on the practical and tax consequences of each method so you can determine the best approach for your situation.

Often, as the seller, you will benefit more from a stock sale, which frees you from double taxation, gets you lower capital gains tax rates for you sale proceeds without worrying about allocation issues, requires less paperwork, and reduces your liability for potential future lawsuits.  Buyers typically favor asset sales since future liabilities are reduced, and because receiving a stepped-up basis in the assets allows buyers to decrease their tax burden in the newly acquired business.  Even if your deal is structured as an asset sale, we will work with you to provide you with solutions that can minimize the disadvantages and strengthen your financial position, such as with negotiated contract terms or price modifications.

4.   Transfer of your commercial lease to the business buyer.

Problems at the closing can arise when a seller can't make a complete transfer of his or her business.  We will review your commercial lease to check for restrictions on your right to transfer the lease of your business space to the new buyer.  If your building landlord refuses to enter into a new lease with the buyer and release you, San Diego Law Firm can negotiate with the property owner so you can transfer your lease and complete the deal.

5.  Heavy equipment transfer

It's important to determine what equipment will be sold as part of the business and whether any equipment leases need to be transferred to the buyer.  Depending on how much equipment is involved, you may be subject to disclosure requirements imposed under the Uniform Commercial Code, the UCC.  We will handle your equipment transfer and help you comply with any legal requirements.

6.   Preparing and filing legal notices

Business sales create legal obligations that you must fulfill.  We will prepare and file all legal notices California law requires, with special note of the following:

• When selling all or most of your business's assets, such as inventory and equipment, you will likely need to comply with California's bulk sales law, which protects the buyer and your business's creditors.  We will determine if your business is subject to this law, and make sure your transfer complies with its notice, recording, and publishing requirements.

• The sale of assets of a business will often require the payment of California sales tax, which generally depends on whether you are selling a services business or sales business.  If your deal is structured as a stock sale, then you won't be subject to sales tax.  We will make sure that you're not faced with surprising sales tax liability after the sale is completed and that you comply with your sales tax obligations.

• If as part of your deal's financing you obtain a lien on the business or any of its assets as security for payment, then we will prepare and file the appropriate notice with the California Secretary of State so that you are paid before the buyer's other creditors in case the buyer defaults. 

• If your business is formed as a corporation, we will ensure legal formalities are complied with which require an election to dissolve your business, and we will handle any issues posed by minority shareholders opposed to the sale.

• We will also prepare and file the appropriate business termination documents with the California Secretary of State.

Benefits to Our Clients

We are committed to keeping our business clients fully informed and offering them the guidance and support they need to make good choices between different legal alternatives.  San Diego Law Firm will ensure that all of your legal matters are supervised by a seasoned senior partner who will act as your Personal Legal Representative and oversee your legal affairs, even if another attorney is performing a particular service for you. For as long as we represent you, you will receive the same dedication and quality of service that brought you to us in the first place.

How to Contact San Diego Law Firm

We handle matters throughout California, and new clients are always welcome. For more information or to make an appointment, please contact us either by:

Telephone: (619) 794-0243

E-mail: contactus@SanDiegoLawFirm.com
 

We can be reached by telephone Monday through Friday, 9:00 a.m. to 5:00 p.m. You may also use the form below to contact us. This form is answered Monday through Friday during the work day. Please remember that for us to become your attorneys, we must first have a written attorney-client agreement signed by both of us, so please do not email any confidential information at this point. After we have reached an agreement with you, we can then exchange information freely. We look forward to helping you.

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