Q: How can I optimize a sale of business assets when the business is no longer in good standing?

In 2015, friends and I started a business. We allocated shares, and set up a vesting schedule. In 2016, we decided to allow the business license (Delaware) to lapse and operate with funds from an existing LLC business I own, however, the other partners do not benefit from the LLC business.

Our original business actually had two businesses that we worked on, and now in 2017, another company has offered to buy one of those businesses for a substantial sum. Will we be able to treat the sale as a long term capital gain as equity holders in the business being sold?

What is the strategy we should pursue to clean up our legal work and optimize the sale?

1 Lawyer Answer

Jonathan R. Roth

Answered

A: More information is needed to give you more detailed advice, but you have two basic options, revive the DE entity and sell the business or document the transfer of the business to the LLC and have it sell the business. The devil will be in the details. I would recommend you sell the assets of the business as opposed to the entity if you use the DE entity and liquidate it for capital gains purposes. Depending on the facts, there may be more options. I would contact a business attorney to assist you in this transaction as it will require some thoughtful drafting in certain agreements.

Assuming you have owned the business for more than 12 months you can get long-term capital gains treatment if the transaction is done correctly. You may have some recapture on some depreciation of assets. If you allocate part of the price to goodwill, that will be treated as the sale of a capital asset and the buyer will be able to depreciate it over 15 years.

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