How to structure Stock Purchase transaction of an S-Corp entity

January 18, 2022

by a searcher from University of Connecticut in Washington, DC, USA

Greetings!

I'm in the process of acquiring a business in the state of Maryland. It's a stock purchase transaction because of gov't contracts that the company has that would be very difficult to transfer over via an asset purchase.

Does anyone in the community have experience with how to best structure the transaction of the entity?

Should I just transfer over the stock of the company to my investors and myself ( Easy path my attorney suggested)?
Or, should I create a new LLC entity that will hold the stock?

SBA requires the entity to be an operating company and not a holding company, so if I understand correctly the second option may not be viable.

My goal is to pursue the path that will be least disruptive to the operation of the company and the gov't contracts while providing enough flexibility in the future.

I'm at the closing stage and would really appreciate some advice from someone who has experience with this topic.

Please comment below or message me. Will make sure to return the goodwill.

Sincerley,

Gazment redacted

Reply by a searcher
from University of Pennsylvania in Seattle, WA, USA

As others have mentioned, get a competent transaction lawyer. You don't mention entity type here but if you are forced into a stock sale due to risk of contract transfer, you can use either 338(h)(10) election or section 754 depending on entity type to tax the transaction as an asset sale. In terms of whether to create a holdco or not, I am curious what you are trying to mitigate with the approach outlined (I am not sure the value of a pass through holdco structure unless the current operating agreement poses issues and you don't want to update it). Have you talked to your LP's? Depending on the investors and fund mandates, you may need to create a c-corp blocker for them to be able to invest (https://frostbrowntodd.com/an-introduction-to-the-use-of-blocker-corporations-in-ma-transactions/). Even in this case, the c-corp blocker doesn't need to own the entire opco if it is tax advantaged for you personally to be taxed on a passthrough basis. From the line of questions and 'what if's', the best structure is highly dependent on the fact pattern in question. If you provide a bit more detail, we can try to help you think through options to consider.

Reply by an investor
from University of Pennsylvania in Charlotte, NC, USA

I would agree 100% with the above comments encouraging you to engage an experienced transaction lawyer and CPA. ^redacted‌ asks a good question: have you talked to your investors? I'd think that the tax structuring would interest them. And ^redacted‌ makes the good point that a 338(h)(10) election is not available to you if the acquiring entity is an LLC. Furthermore, a 338(h)(10) must be elected jointly by buyer and seller, so this is not something you can proceed with unilaterally. In addition, you don't indicate the type of company, so I'm wondering about the tax consequences for both buyer and seller from a transaction treated for tax purposes as a deemed asset purchase, and to what extent this has been discussed with seller. You note that you are at the closing stage but it seems there are some important discussions that must first occur in short order with investors, lenders and seller, all of which should be done with the counsel of an experienced transaction attorney.‌

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