Google Answers Logo
View Question
Q: Selling a business as an LLC or C-corporation in the U.S.? ( Answered 5 out of 5 stars,   0 Comments )
Subject: Selling a business as an LLC or C-corporation in the U.S.?
Category: Business and Money > Finance
Asked by: tjgill99-ga
List Price: $40.00
Posted: 23 May 2005 09:02 PDT
Expires: 22 Jun 2005 09:02 PDT
Question ID: 524642
What are the pros and cons of selling a business as an LLC or a
C-corporation to a Public company?  Particularly pertaining to venture
capital and return on investment to shareholders?

I already know a lot of pros and cons of LLC v. C-corp.  This question
is really about pros and cons when selling the entity.  I have been to already
Subject: Re: Selling a business as an LLC or C-corporation in the U.S.?
Answered By: richard-ga on 23 May 2005 18:22 PDT
Rated:5 out of 5 stars
Hello and thank you for your question.

Public companies are almost always corporations, so as I describe
below, there is something to be said for organizing your venture as a
corporation at the start.  You'll probably want to make a subchapter S
election, however, especially if there's a likelihood you will run a
tax loss in your startup years.  That will allow the founders to
deduct any losses on their personal returns, and will eliminate most
exposure to double tax.

"An eligible domestic corporation can avoid double taxation (once to
the shareholders and again to the corporation) by electing to be
treated as an S corporation. Generally, an S corporation is exempt
from federal income tax other than tax on certain capital gains and
passive income. On their tax returns, the S corporation's shareholders
include their share of the corporation's separately stated items of
income, deduction, loss, and credit, and their share of nonseparately
stated income or loss.",,id=98263,00.html

If you are so fortunate as to have your organization acquired by a
public company, the advantage of organizing your venture as a
corporation is the possibility of the acquisition being structured as
a tax-free reorganization under Internal Revenue Code Section 368.

There's a good, short summary of the reorganization rules on pages 51-52 of
2001 Federal Taxation Refresher Course

See also:
Tax Implications of statutory merger ("A" reorganization)
"IRC §368(a)(1)(A)—basic requirement for classification = transaction
carried out under state statutory merger provision
Target shareholders must have “continuity of interest”, so long as 50%
of consideration is voting stock ok to receive cash, bonds, etc."
Commentary on Law and Cases of Business Corporations, 1st. Ed

Tax Implications of "B" reorganization
"IRC §368(a)(1)(B)— 
Defined as 80% of voting power of the target now held by the acquirer 
Must be funded SOLELY by stock of the acquirer for tax classification 
One level of tax —target shareholders each pay a tax on their capital gain 
No ability to amortize the purchase priceā but deductions from stock
costs not very high (not so bad for acquirer)"

Tax Implications of "D" reorganization (triangular merger)
"IRC §368(a)(2)(D)—allows subsidiary to use its parent’s stock instead
of its own to carry out the merger (one or the other)
Generally treated as type A mergers —tax free (deferred) reorganization 
Even though the transaction as a whole may qualify for tax free
treatment, the non-common stock proceeds (i.e. cash, bonds) are

[In some circumstances, as the following Regulations describe, it is
also possible to structure a Section 368 statutory merger around an
LLC as well as a corporation, but this is a highly technical area, and
sometimes the merger involving an LLC will qualify; sometimes it
and see Multiple Step Acquisitions: Dancing the Tax-Free Tango ]

Corporate structures are also most useful where the hope is to attract
venture capital.
For example, "Mezzanine financing represents the middle layer of
financing on the balance sheet of an investee company after senior
debt, which is traditionally provided by the major banks. A typical
mezzanine investment includes a term loan and some form of equity or
equity-like participation ? normally stock, warrants to purchase
stock, or a participation right. This structure gives mezzanine
financing characteristics of both debt and equity financing. The
interest rate charged on the loan component can vary but is normally
around 8-12% with varying payment options. The loan is almost always
subordinated to loans made by one or more senior secured lenders, such
as the major banks. "
Private equity ideas

And see, "Represented venture capital fund in a $1.8 million bridge
loan to a corporation using convertible promissory notes and the
subsequent corporate reorganization of issuer."

To summarize, although this is a very technical area, it's safe to say
that a corporate form is most amenable to public company acquisitions,
and might even be tax free.  And venture capital funding is most
easily attracted to a corporate structure.

Search terms used:
subchapter s basics
368 reorganization "statutory merger"  basics

Thanks again for letting us help.
Google Answers Researcer

Request for Answer Clarification by tjgill99-ga on 24 May 2005 08:03 PDT
-excellent research on c-corp benefits and tax free M&A
  It seems like what I have found is that it can be really costly
(legal costs) to sell an llc.  and you don't have access to all the
forementioned benefits of the selling a C-corp entity.  Could you post
some the pros of the selling an LLC to a public co. or C-corp?  would
anyone ever want to do this?
thanks for your help-

Clarification of Answer by richard-ga on 24 May 2005 08:31 PDT
Thanks for the rating and the tip.
Selling an LLC to a corporation would work as a sale of assets.  It
would be a taxable sale, but there wouldn't be a double tax problem. 
Much but not all of the proceeds would also qualify for capital gains

tjgill99-ga rated this answer:5 out of 5 stars and gave an additional tip of: $5.00
great links for follow up research, it really helped me out!

There are no comments at this time.

Important Disclaimer: Answers and comments provided on Google Answers are general information, and are not intended to substitute for informed professional medical, psychiatric, psychological, tax, legal, investment, accounting, or other professional advice. Google does not endorse, and expressly disclaims liability for any product, manufacturer, distributor, service or service provider mentioned or any opinion expressed in answers or comments. Please read carefully the Google Answers Terms of Service.

If you feel that you have found inappropriate content, please let us know by emailing us at with the question ID listed above. Thank you.
Search Google Answers for
Google Answers  

Google Home - Answers FAQ - Terms of Service - Privacy Policy