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Asset Purchase vs. Stock Purchase: Advantages and Disadvantages

In deciding to purchase an existing business, the buyer must determine whether they will buy the assets or the stock of the business entity. An asset purchase involves the purchase of the selling company's assets. This includes facilities, vehicles, equipment, and stock or inventory. A stock purchase consists of purchasing the selling company's stock only.

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Availability of Sale Depends on Business Entity

The type of sale available to you depends on the legal structure of the selling business. You can find the legal structure of the selling business on the Secretary of State website.

Sole Proprietorship, Partnerships, and LLCs

If you want to buy these types of businesses, you can't do a stock sale:

None of these entities have stock to sell. This means you could only do an asset sale or purchase their assignable membership interest. The alternative is that owners can sell the new owner their partnership or membership interests. The company could also sell intellectual property assets, such as trademarks and copyrights.

Corporations

What if the business is a C-corporation or S-corporation? Suppose the business is incorporated like a C-corporation. In that case, the buyer and seller must decide whether to structure the deal as an asset or stock sale.

The following information discusses the advantages and disadvantages of asset purchase agreements compared to stock purchase agreements.

Advantages of an Asset Purchase Compared to a Stock Purchase

In an asset acquisition, the buyer specifies the liabilities it's willing to assume. The buyer can leave other liabilities behind. In a stock purchase, the buyer purchases stock in a company with unknown or uncertain liabilities.

Suppose the purchase price exceeds the aggregate tax basis of the acquired assets. In that case, the buyer receives a step-up basis in the assets equal to the purchase price.

By purchasing assets rather than stock, the buyer avoids the problems presented by minority shareholders who refuse to sell their shares.

Purchasing a business through an asset acquisition is less complicated from a securities law perspective. The parties generally aren't required to comply with state and federal securities laws and regulations.

Goodwill can be amortized by the buyer over 15 years for tax purposes.

Disadvantages of an Asset Purchase Compared to a Stock Purchase

The selling company's assets must be re-titled in the buyer's name. This isn't required in a stock transaction.

In a stock transaction, the buyer can typically obtain the selling company's non-assignable contracts, permits, and licenses without the other party's consent.

Asset purchases don't qualify for tax treatment as a tax-free reorganization.

A stock transaction will normally be easier if the selling company has a small number of shareholders.

In states that impose sales or transfer taxes on the sale of assets, a stock transaction can avoid some or all of these taxes that apply in the event of an asset transaction.

Finalize Your Asset or Stock Purchase

Once you decide which option is the best for you, you need to get an agreement in writing and do the following:

  • File any filings with the state of incorporation's secretary of state
  • Review any leases or real estate deeds that came with the individual asset sale to ensure ownership transfers
  • Record the purchase price so you can track the depreciation. This helps track your tax benefits
  • If you sell the asset or stock, send the information to your accountant to note capital gains tax and tax implications for the Internal Revenue Service (IRS)

Don't forget to do any re-titling of any physical or land assets you purchased.

Have a Business Lawyer Help You With Your Asset or Stock Purchase

As you can see, you must do your homework and due diligence in business law. There are several key advantages and disadvantages for a business owner buying a target company or selling a business. While this may all seem complicated, it doesn't need to be. Talk to a small business lawyer to help you understand the differences and answer any important questions, like tax advantages and specific asset sales.

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