By: Bryan Uecker
When a seller has a BORSA™ (Business Owners Retirement Savings Account), also known as ROBS, and is considering selling their business, the decision between an asset sale and a stock sale involves additional considerations due to the BORSA/ROBS structure. Here’s a comparison of the two approaches in this context:
Asset Sale
1. Definition: In an asset sale, the buyer acquires specific assets and liabilities of the business rather than the entity itself. This includes tangible assets (like equipment and inventory) and intangible assets (like trademarks and customer lists).
2. Tax Implications: For the Seller: The business entity may face double taxation. First, the entity is taxed on the gain from the sale of assets at the corporate tax rate. Then, any remaining sale proceeds are distributed to shareholders according to their ownership percentage and taxed accordingly. For the Buyer: The buyer benefits from a step-up in the basis of the acquired assets, which allows for depreciation or amortization based on the purchase price, potentially reducing future tax liabilities.
3. Complexity: Asset sales require detailed purchase price allocation among various assets and involve complex tax considerations.
4. Liability: The buyer assumes only the liabilities specifically agreed upon in the sale. This reduces the risk of inheriting unknown or contingent liabilities.
5. BORSA/ROBS Considerations: The C-Corp will have to estimate its federal and state tax bill, pay the estimated taxes, pay its final expenses, dissolve, and lastly, any remaining cash gets distributed to the stockholders according to ownership percentage. So, if the 401(k) owns 95% of the company, 95% will go to the 401 (k). The double taxation kicks in when the seller eventually takes retirement distributions taxed as ordinary income. The 5% going to the individual is taxed using capital gains rates.
Stock Sale
1. Definition: In a stock sale, the buyer acquires the company’s shares, gaining ownership of the entire entity, including all its assets and liabilities.
2. Tax Implications: Selling stock can be advantageous for the seller. 95% goes to the 401(k) plan with no tax due until the seller takes retirement distributions. The personal stock portion will be taxed using capital gains treatment, potentially resulting in a lower tax rate on the proceeds. For the Buyer, the buyer assumes the company’s existing tax basis in its assets and takes on all of the business’s liabilities, which may include unknown or contingent liabilities.
3. Complexity: Stock sales tend to be less complex from a transactional standpoint than asset sales, as the focus is on transferring ownership rather than valuing and transferring individual assets.
4. Liability: The buyer inherits all the company’s liabilities, known or unknown, which can be a significant risk factor.
5. BORSA/ROBS Considerations: If the seller’s BORSA plan holds stock in the company, the plan will sell its shares for cash as part of the stock sale. The account can then be rolled into an IRA or other retirement plan vehicle and won’t be taxed until withdrawn. The portion owned outside the plan will be taxed using capital gains rates.
Conclusion
The BORSA™/ROBS structure affects both asset and stock sales of a business. The choice between the two will depend on various factors, including tax considerations, liability issues, licensing issues, and the specific goals of both the seller and the buyer. DRDA is uniquely positioned to help you navigate these complex transactions and ensure compliance with tax, Department of Labor, banking and regulatory requirements so you keep more of what you have earned from growing your business.
