Selling your company is a big decision. One of the key decisions you need to make is the method of selling because it will affect matters such as your taxation and other practicalities.
You can sell a limited liability company either through a sale of shares or a sale of business.
Differences between a sale of shares and a sale of business
The key difference is the party selling the company.
In a sale of shares, the company’s shareholders sell the shares entitling ownership of the company to the buyer. The shareholders get the sales price themselves. Through the transaction, all the rights and responsibilities attached to the ownership of shares, such as debts and liabilities, are transferred to the buyer.
The sale of shares of a limited liability company doesn’t in itself affect the company’s operations, but it’s possible that the new owners want to develop the company’s operations and make changes.
In a sale of business, the company sells its business to the buyer, either in part or in full, and the buyer pays the acquisition price to the seller company. As part of the transaction, the company’s customer and contractual relationships are often transferred to the buyer.
However, debts and liabilities are not transferred but remain with the seller. Neither does a business transfer affect the ownership of shares of the seller company.
Impact of a sale of shares and a sale of business on taxation
The sale of shares has no tax consequences for the company. Instead, the shareholder selling the shares will become liable to pay tax. The buyer, on their part, will have to pay the transfer tax.
The seller may deduct the acquisition cost of shares from the sales price. The difference is considered a sales profit, i.e. a capital gain, on the basis of which the tax on sales profit is determined. The capital gain is taxed as capital income. The tax rate on capital income is 30% up to 30,000 euros and 34% for the part exceeding that amount.
If the seller of shares is a limited liability company, the tax treatment depends on whether the share transaction is subject to tax under the Business Income Tax Act or the Income Tax Act.
In the sale of business, the seller is the company. Therefore, the sales price is considered income for the seller company, which has to pay a 20% tax based on the corporate tax rate. However, the seller company may deduct the unamortised purchase price from the sales price in income taxation. The difference is considered as income.
From the shareholder’s viewpoint, a business transfer is subject to double taxation: the company pays tax in connection with the sale of the company, and the shareholders pay tax when they draw down funds gained from the business transfer in the form of salary or dividend.
Which option should you choose?
Each sale of a company and the choices it involves are unique.
Several aspects need to be considered when choosing the method of sale. The key aspects include, among other things, the sales price, the terms of sale, taxation, the need for funds and the seller’s future plans.
Several companies in Finland specialise in corporate sales and acquisitions. OP helps you in planning an acquisition and the related financing.