Scenario 3: X Co. is an LLC taxed as a partnership. 2) Property if sold by the partnership, would not be a capital asset or IRC § 1231 property. Sale of Assets vs. Sale of Partnership Interests. The special election avoids double taxation because the IRS takes into account only the deemed asset sale and ignores the stock sale for tax purposes. Our discussion is also limited to the case of a business carried on inside a regular or “C” corporation. In that case, an asset sale is often more efficient than a stock sale. A. Passthrough Entity. 1) Stock in trade & property held for sale to customers in the ordinary course of business - IRC § 1221(l). The two most common ways to sell a business are either through an asset sale or a stock sale. In this instance, A recognizes $130 of ordinary income and $60 of capital gain on the sale of his interest. Different considerations apply to a business carried on in an “S” corporation or in an entity taxed as a partnership. This means, generally, that tax consequences of transactions are taxed to the partners instead of at the entity level. B. https://www.wallstreetprep.com/knowledge/asset-sale-vs-stock-sale The seller maintains the legal structure of the business and continues to run a business with the remaining assets and liabilities. This tax treatment is predominantly related to the ability for a buyer to step up the tax basis of assets to fair market value (FMV), as opposed to a typical stock deal, which is on a carryover basis. Selling or Buying Partnership Interests vs. Assets zWhen the business is operated as a partnership, there is little tax difference between selling assets and selling an interest in the partnership – This is because when partnership interests are sold, the sale triggers a liquidation of the partnership assets into the hands of the buyer. But what if the business is a C-corporation or S-corporation? If the buyer is not a single corporation – for example, a partnership, an individual, or more than one person – then the shareholders of the target S corporation may be able to elect (without the consent of the buyer, but certainly at its insistence) to treat the stock sale as a sale of assets, as described above. A partnership (or a limited liability company (LLC) which is taxable as a partnership)1 is a pass-through entity. If the business is incorporated, as a C-corporation, the buyer and seller must decide whether to structure the deal as an asset sale or a stock sale. The type of sale that is used depends on a variety of factors such as what type of business entity the company is, how many assets it has, and how many liabilities it has. The alternative is that owners can sell their partnership or membership interests as opposed to the entity selling its assets. After the purchase with either election, the buyer owns the stock but the target remains a legal corporate entity. 4) Property which would be classified as inventory if Because a partnership If you are thinking about selling your company (see also Getting Ready for an M&A exit and Negotiating a Term Sheet), you should carefully consider how to best structure the sale.Below is a quick primer on some of the advantages and disadvantages of the most common acquisition structures: mergers, stock sales and asset sales. Selling stock vs. selling assets The most important consideration in determining the tax treatment of an S corporation sale is how the transaction is structured. A Section 338 is used when parties to the acquisition would like the tax treatment of an asset deal, but the legal structure of a stock deal. Any unknown or contingent liabilities remain locked inside the target corporation. 3) Stock of a foreign investment company subject to recapture under IRC § 1246. 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