Selling your Business to your children. What structure is best?

When selling a business their children, my clients often as me if they should sell the existing company, or of its better to just let their children set up a new entity.  Both options have some pros and cons, of which this article will take a look.

1. Child Forms New Corporation/LLC & Buys Assets

(Asset Purchase)

Pros

• Liability Protection: The child’s new entity does not inherit past liabilities of the old practice (lawsuits, unpaid taxes, contract disputes, employment claims, etc.), unless specifically assumed.
• Clean Start: The child can structure new contracts, leases, insurance, and staffing on their own terms. Any “baggage” with vendors or employees doesn’t automatically carry over.
• Depreciation/Tax Benefits: Purchased tangible assets (equipment, furniture, etc.) can be re-depreciated by the new entity, giving fresh tax deductions. Intangible assets (goodwill, patient lists) can be amortized over 15 years under IRC §197.
• Choice of Entity: The child can choose whether to operate as an S-corp, C-corp, or LLC depending on tax and liability strategy. Doesn’t have to live with parent’s old structure.

Cons

• Contracts & Licenses: Some contracts (leases, service agreements, insurance provider agreements, professional licenses) may be difficult or impossible to assign, requiring renegotiation.
• New EIN / Credit History: The child’s new entity starts without an operating history, which can make financing, credit lines, and vendor relationships harder.
• Sales Tax Issues: In some states, sales tax may apply on the transfer of tangible assets.
• Potential Double Tax (if C-Corp): If the old company is a C-corp selling assets, it pays corporate tax on gain, and then the parent pays tax again when distributing proceeds. For an S-corp or LLC this isn’t a problem.

2. Child Takes Over the Old Corporation/LLC

(Stock or Membership Interest Purchase)

Pros

• Continuity of Business: Licenses, contracts, leases, and provider numbers usually remain intact. Patients, insurers, and vendors see little disruption—business runs as usual.
• Credit & History: The entity keeps its existing credit history, EIN, banking relationships, and established vendor/employee arrangements.
• Simpler Transfer: From a paperwork standpoint, sometimes easier—transfer shares or membership units rather than retitling every contract and asset.

Cons

• Inherited Liabilities: Child inherits all past liabilities—known and unknown (IRS issues, employment claims, malpractice tail, contract breaches). Even with indemnification agreements, the entity itself is exposed.
• No New Depreciation: Assets are carried at existing book/tax basis; no new depreciation/amortization deductions.
• Entity “Staleness”: If the entity structure isn’t optimal (wrong entity type, poor governance history), the child is stuck unless they restructure later.
• Risk of Audit/Regulatory Scrutiny: Regulatory history of the entity (billing, compliance, licensing) carries forward and may affect the child’s future.

Summary & Typical Guidance

• Asset Purchase into New Entity is usually safer for the child—clean break from past liabilities, better tax benefits. More paperwork upfront, but cleaner long-term.
• Stock/Entity Purchase is sometimes used where continuity is crucial (e.g., certain professional licenses or contracts can’t be reassigned, or a brand name is tied to the entity). But the child must accept liability risks and may lose tax benefits.

In practice sales to children, we often recommend new entity / asset sale unless there’s a regulatory or contractual reason to preserve the old company.