By Spencer G. Nauman, Jr.
When a business owner is considering dissolution of a business, there are several crucial issues which should be addressed. These issues may occur at any stage of the dissolution, and if not addressed carefully, they could have large repercussions for the acquirer or disposer. In this article, it is assumed that the decision to dissolve has been made either because the owners do not want to continue the business, or they have sold or are in the process of selling the assets and distributing the net proceeds to the owners or certificated beneficial interest holders.
Need for Expert Advice
Since the issues and steps involved in a dissolution are complicated and time-consuming, the need for expert advice is critical. The initial experts to consult are the accountant and lawyer of the business owners considering dissolution. These professionals are needed to prepare basic financial information and provide legal advice as to tax consequences.
Usually, a dissolution of a business has personal ramifications for the owner of the stock or certificates of beneficial interest in the case of an LLC. It is generally recommended the accountant and lawyer review those ramifications with consideration of the owner’s interests.
One of the principal reasons for a dissolution is the sale of the business’ assets. Most purchasers of a business do not want to buy the real estate or be subject to the liabilities of the business. Therefore, the purchaser buys the assets of the business from the corporation or LLC. If the business is an LLC or an S corporation, there will be only tax at the stockholder or interest owner level. If the business is a C-type corporation, there are federal and state taxes at the corporate level on the sale of the assets and federal state taxes at the shareholder or certificate holder level.
The Financial and Tax Consequences of a Dissolution
If the business is profitable and has developed substantial capital accounts for the shareholders or certificate holders, dissolution of a business can, because of the taxes incurred, be an expensive transaction. Because of the probability of unpleasant surprises, it is crucial to know what the tax ramifications and net benefits are to the shareholders or certificate holders before doing the dissolution.
If the dissolution is to follow a sale, it would be best to know the financial consequences to the shareholders and certificate holders even before the asset sale by the business. It may be worthwhile not to dissolve and to continue as a pocket holding company investing for the certificate holders or shareholders. In addition to current financial information, the independent accountant of a party to an acquisition or disposition should also be asked to provide a description of the financial situation after the proposed transaction.
The Business Tax Consequences of the Transaction
An acquisition or disposition is a taxable transaction for federal or state purposes unless it can be done as a reorganization which is generally not deemed a taxable transaction under those laws.
The Form of the Transaction
Because of the interest in limiting the legal liability of owners, a business is usually a corporation, partnership, or a hybrid of both. It follows that the acquisition or disposal must be done in accordance with provisions of the state business law to be effective as a continuing limited liability shield against personal injury or contract liability. Forming the transaction to minimize adverse tax consequences is also important.
Termination of the Transaction
Because the issues described in this article may not always be immediately apparent, consideration must also be given to strategies to amend the acquisition or disposition arrangements during the course of the transaction, or to terminate the transaction completely in the event that an unanticipated issue arises that is so serious the transaction should not be consummated.
The decision of whether or not to continue with a dissolution should be made carefully and only after being fully informed by the expertise of a personal accountant and lawyer. Although it does not encompass every situation that should be weighed or that may occur, the above factors provide various considerations for those thinking about dissolution as well as general advice on how to proceed with a high likelihood of achieving a good result.
Spencer G. Nauman Jr., is the senior partner of the Harrisburg law firm Nauman, Smith, Shissler and Hall, LLP, Harrisburg’s oldest law firm. Mr. Nauman has been a lawyer with the firm for more than 40 years and his primary practice areas are corporate, probate/estate planning, taxation and insurance. Mr. Nauman represents several community foundations and the state community foundation organization. He is serving or has served as Director and President of business as well as community health, educational and social service organizations.