Purchasing a Business: Stock Sale versus Asset Sale
Author: Attorney Peter J. Curran
If you are looking to purchase a business that is organized as an entity (such as a corporation or LLC), one of the preliminary questions is whether to purchase the entire entity (stock sale) or just the assets of the business (asset sale). Each has its pros and cons, which vary depending on each situation.
For purposes of this article, I will use the term “stock sale” broadly to include not just the sale of stock in a corporation, but also the sale of membership interests or units for LLCs.
With a stock sale, you purchase the ownership of the entity. One of the general benefits of a stock sale is that you do not have to execute conveyances (deeds, titles, bills of sale, etc.) if the entity owns many assets.
From a buyer’s perspective, a stock sale does not allow the buyer to gain a “stepped-up” basis in the assets, so the buyer cannot re-depreciate them, which can result in higher future taxes for the buyer. There is also the additional issue of taking on unknown or undisclosed issues, such as environmental concerns, employee issues, or other liabilities, which become the responsibility of the new owner. However, if the business relies on a few large customers or vendors, a stock sale may increase the likelihood of retaining these contracts.
From a seller’s perspective, the proceeds from a stock sale are taxed at the capital gains rate, and in C-corporations, the corporate level taxes are bypassed. The seller may be less responsible for the issues which the buyer takes on as part of a stock sale.
With an asset sale, the buyer is purchasing only the assets from the corporation or company. These assets can include real estate, equipment, fixtures, licenses, goodwill, trade names, and inventory. It can also include accounts receivable, prepaid expenses, and accrued expenses.
From a buyer’s perspective, an asset sale can allow the buyer to “step-up” the basis of assets for purposes of depreciation, subject to IRS guidelines. Asset sales also make it easier for buyers to avoid inheriting potential liabilities.
From a seller’s perspective, asset sales can generate greater tax consequences. While “intangible” assets (such as goodwill) are taxed at the capital gains rate, “hard” assets can be subject to ordinary income tax rates based on the seller’s tax bracket, especially in the case of the more common “pass through” entity structure.
While this article sets forth some of the general considerations buyers and sellers should consider when deciding whether to engage in a stock sale or asset sale, each transaction is unique and can pose its own set of issues. You should contact an experienced business attorney to help navigate these issues.