General Sell-Side Structuring Considerations – a Roadmap
Your sell-side considerations will vary significantly based on the tax status of the selling company you are selling, the tax status of the buyer entity, and the amount of any rollover equity you’re taking as consideration in the transaction. The following is intended as a guideline for considerations with links provided for more information on certain issues. However, every situation is different and nuances matter in tax, so we recommend you consult with a tax professional (preferably an Acta tax professional) on the applicability of these issues to your facts.
With respect to selling entities:
Partnerships will offer you the most exit flexibility, but holding period issues and rollover structuring will be critical to optimizing tax efficiency.
S corporations are generally less flexible and require resolution of the asset or stock sale question. Once that path is determined, the decision tree gets more complicated because in an asset sale, you need to consider rollover issues, which can be challenging in an asset sale through an S corporation, as well as the legal structure of a tax asset sale should be considered, and whether any disguised sale benefits can be obtained. Stock sales are simpler from a structuring perspective, but you’ll still want to think about things like minimizing your net investment income tax impact, and work through any cash-to-accrual issues that may exist.
C corporations offer one tax-efficient path and that’s the sale of stock. If you’ve agreed to sell assets out of a C corporation before talking to an Acta professional, there may be options to minimize the adverse impact created by this agreement. Additional structuring considerations exist, including net investment income tax opportunities. Additionally, Section 280G rears its ugly head and, in the private company context, sellers should evaluate the shareholder vote exception. Finally, because the Section 1202 income exclusion is so meaningful, make sure that your planning takes into consideration the timing and continuation (to the extent possible) of this opportunity.
If you’re receiving rollover equity in the transaction and the potential buyer is:
A partnership, you’ll want to consider the treatment of acquisition debt in the transaction, as that will impact your gain recognition. Additionally, you’ll want to closely negotiate the Section 704(c) methodology adopted by the partnership as that can result in phantom income to you over the life of the partnership. Finally, a partnership will offer you the most exit flexibility, but holding period issues and rollover structuring will be critical to optimizing tax efficiency.
A corporation, the biggest issue will be whether you can achieve tax-deferred treatment on your rollover equity. In many circumstances, you can structure into a tax-deferred contribution (whether directly or through a parent Holdco structure). Alternatively, for selling corporations, reorganization structures may be available to defer taxation on the rollover component; however, care should be taken to meet both the statutory and non-statutory requirements of these provisions.
