Tax Liability with Disposition of a Company

When liquidating (selling) your company, there are a few things for your valuator to consider. Tax liability is the prime cost of doing business and even so during the disposition consideration.

There are a few things to consider when using the liquidation method. What is the type of corporation? Where is the source of income? Tax rates? Capital gain or business income or income from property? With the liquidation method, assets are sold individually and the tax liability is bear by the seller. As a result, seller’s tax rate is used when liquidating assets. All these questions need to be answered before a valuator can produce a valuation report for the assets being liquidated.

Different Business Forms Can Affect Your Tax Liability

Business forms would also affect the use of liquidation method. For Canadians, there are three main structures including sole proprietorships, corporations, and trusts. Under entities, there could be different types of partnerships or ventures with different agreement for operating or tax reasons.

Sole proprietorships are essentially running the business as an individual. The owner pays one tax and bear all liabilities of doing business. A corporation is a separate entity and protects the owner from liability beyond the invested capital with certain exceptions. Partnerships are commonly used to operate and have tax flow efficiently from top to bottom for investors and partners. In that sense, a trust is very similar as a partner (for a partnership) or a beneficiary (for a trust) is ultimately liable for tax on distributed profits. Trusts and partnerships are flow-through entities and they are effective in income distributions.

Different Income Types Can Affect Your Tax Liability

The type of income and deduction should be considered because they determined how it will be taxed and at what rate. There are three types of income in general but certain type of income are subject to tax rules and the valuator must be able to recognize them and their applicable tax rates. Active income and property income are taxed differently because the latter is a passive income and a certain number of employees is required to qualify its business income as active business income. Capital gains are different from both because they represent the profits or losses from the sale of your capital asset and do not occur as frequently as operating income. All of these incomes have different tax rates and rules, you can visit the Ernst & Young website for more information.

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