Sheehan & Associates, P.L.C.

Understanding how a business is sold

Business owners and entrepreneurs in Michigan might find it beneficial to learn more about the sale of an enterprise as described by the IRS. Each asset associated with the business is to be sold individually so gains and losses can be properly evaluated. However, because many businesses require a variety of assets to sustain operations, the assets should be classified appropriately.

The typical classifications for assets of an enterprise up for sale often include property held for sale like stocks or inventory, real property used by the business, depreciable property used by the business and capital assets. When the business sells inventory, the transaction is assessed as an ordinary income or loss. When an interest in a joint venture or partnership is divested, the transaction may be classified as a capital asset. With these types of organizations, any loss or gain that results from unrealized inventory items or receivables are classified as an ordinary gain or loss.

In regards to corporate interests, ownership stakes are often represented as stock certificates. When the stock certificates are sold, the transaction is classified as realizing a capital gain or loss. When corporate liquidation occurs, property is typically classified as an exchange or sale, and gains or losses are recognized. In addition, in the event of a liquidation distribution of assets, a gain or loss may be recognized as if the distributee received the assets at fair market value.

Business owners, investors and entrepreneurs interested in learning more about these types of transactions might benefit from consulting a lawyer. Legal counsel might be able to review the terms of the transaction in an effort to ensure that there are no provisions that could adversely affect the client's long-term interests. Lawyers may also be able to help business owners properly account for the dissolution in an effort to avoid any legal trouble with the IRS.

Source: IRS, "Sale of a Business", December 23, 2014

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Sheehan & Associates, P.L.C.
1460 Walton Blvd , Suite 102
Rochester Hills, MI 48309

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