Article Date: 5/1/2005

business advisor
Smart Purchasing
Lay out all of your options and seek expert advice before you sign a deal to buy a practice. It could save you a lot.
Jerry Hayes, O.D.

Like many optometrists, I think that buying a practice is a great way to add another location or to expand an existing practice. In fact, that's how I got started when I graduated from optometry school years ago.

But buying a small business isn't quite the straightforward exercise that purchasing something such as a piece of equipment is. (And that's particularly true if the practice you want to purchase is a C Corporation.) According to Ken Hicks, C.P.A., the single biggest mistake you can make is to buy stock in a C corporation instead of buying its assets. Following are reasons why you should heed this advice.

ILLUSTRATION BY PAINE PROFFITT

Who wants liability?

When you buy stock in a C corporation rather than its assets, you inherit the previous owner's liabilities. Assume you bought a well-run practice known as The Vision Clinic from the estate of a recently deceased optometrist But before your purchase (and totally unbeknownst to either party), the seller had mishandled the firing of a receptionist.

Because you bought the stock and maintained the original corporation, The Vision Clinic remains the same business entity in the eyes of the law. That means a disgruntled employee can sue The Vision Clinic, even though you're not the guilty party.

But can't a suit such as this occur even if you buy the assets? Yes, that's why it's a good idea to buy the assets and then move them to a new corporation. That way, an employee lodging a complaint against the previous owner would have to sue his original corporation, which no longer has assets.

I want to be clear here, this is not a way to use sophisticated legal tactics to get out of an obligation that is truly yours. On the contrary, you're trying to protect yourself from getting ensnared in a legal nightmare that you had nothing to do with.

Don't lose your deductions

You lose tax deductions on the purchase of assets. Unfortunately, you can't take any of the usual tax write offs on equipment and inventory when you buy stock in a C corporation -- at least not until you sell the stock or it becomes worthless. That distinction alone can cost you tens of thousands of dollars in tax savings.

You lose tax deductions on interest. As we all know, you can fully deduct interest payments on business loans used to purchase assets in a practice. However, interest paid on a loan for the purchase of C corporation stock is only deductible to the extent that you have offsetting investment income. Therefore, if you're paying 5% interest on a $500,000 loan ($25,000 each year) and you earn $1,000 in interest income, then you could only deduct $1,000 -- not the full $25,000 in interest you paid.

Expert advice pays

While the acquisition of a C corporation can seem particularly complex, even the sale of simple proprietorships and S corporations contains a number of important tax considerations for both buyer and seller regarding the allocation of good will and deductible assets. For that reason, it's smart to have a knowledgeable C.P.A. or tax attorney to help you structure the deal before you sign anything. 

THE RESOURCE FOR THIS ARTICLE WAS KEN HICKS, C.P.A., OF VICKSBURG, MS. HIS FIRM WORKS WITH OPTOMETRISTS ON TAX AND PRACTICE ACQUISITION MATTERS IN 26 STATES. YOU CAN REACH HIM AT 601-636-0096.

 



Optometric Management, Issue: May 2005