The Depreciation of Assets Upon the Sale of an LLC

Depreciating assets may be the last thing on an entrepreneur's mind when selling a limited liability company, but the owner must heed this aspect to calculate the correct gain or loss on the sale. Besides asset depreciation, an LLC owner thinks about profitability and fiscal implications when selling the company.

Depreciation

Depreciation is the mechanism through which a business recognizes that passage of time favors obsolescence in its asset base. The company depreciates its resources by allocating their values over several years, a time frame accountants call "useful life." Not all assets are subject to depreciation; only fixed, or tangible, assets have to go through the lens of depreciation. Tangible assets include buildings, equipment and machinery. There are many ways of depreciating an asset, but the most popular methods are straight line and accelerate. A straight-line depreciation method allocates asset costs evenly over several years. An accelerated method of depreciation allocates higher amounts in earlier years.

Corporate Assets

A company relies on its assets to win the economic competition, remain solvent, make more money and expand its operations. Besides long-term assets, the firm may rely on other resources to outflank its rivals. Referred to as short-term assets, these resources run the gamut from cash and inventories to accounts receivable and such marketable securities as stocks and bonds. All organizations, including LLCs and government agencies, have assets and liabilities. These are components of a balance sheet, also known as a statement of financial position or statement of financial condition.

LLC

An LLC is a type of legal entity, or investment structure, that shields investors and shareholders from personal liability if the venture turns sour. In essence, an LLC owner cannot lose more than the amount invested in the company. This offers an important legal advantage because LLC stockholders are not personally responsible for the firm's obligations in case of temporary financial hardship or bankruptcy. This is distinct from the scenario that sole proprietorships face, because single owners generally are liable for company debts.

Connection

The depreciation of assets upon the sale of an LLC is not distinct from the type of depreciation a firm applies to its assets in the normal course of business. Put more simply, the company buying the LLC, or the newly formed LLC, takes assets sold at their book value. The newly constituted entity determines whether it should apply a straight-line or accelerated method, depending on the asset. To record depreciation expense, a bookkeeper debits the depreciation expense account and credits the accumulated-depreciation account. The owner or company selling an LLC has no depreciation entry to make, since no more assets are on the corporate balance sheet.

References

• "William and Mary Law Review"; Federal Taxation -- Depreciation of Assets in the Year of Disposal; 1964
• American Institute of Professional Bookkeepers: Depreciation Under GAAP (For Book Purposes)
• IRS: Overview of Depreciation
• IRS: Limited Liability Company (LLC)
• California Franchise Tax Board: Businesses