In making the decision to purchase an existing business, it is necessary for the buyer to determine whether he or she is going to seek to purchase the assets of the business, or the stock of the business entity. An asset purchase involves the purchase of the selling company's assets -- including facilities, vehicles, equipment, and stock or inventory. A stock purchase involves the purchase of the selling company's stock only.
Sole Proprietorship, Partnerships and LLCs
Keep in mind, if you are considering purchasing a sole proprietorship, a partnership, or a limited liability company (LLC), you won't be able to conduct a "stock sale." Why? Quite simply because none of these entity structures have stock by their very natures. The alternative is that owners can sell their partnership or membership interests as opposed to the entity selling its assets. But what if the business is a C-corporation or S-corporation? If the business is incorporated, as a C-corporation, the buyer and seller must decide whether to structure the deal as an asset sale or a stock sale.
The following table discusses the advantages and disadvantages of asset purchases as compared to stock purchases.
| ADVANTAGES of an Asset Purchase Compared to a Stock Purchase | DISADVANTAGES of an Asset Purchase Compared to a Stock Purchase |
|---|---|
In an asset acquisition, the buyer is able to specify the liabilities it is willing to assume, while leaving other liabilities behind. In a stock purchase, on the other hand, the buyer purchases stock in a company that may have unknown or uncertain liabilities. |
It is necessary for the selling company's assets to be re-titled in the name of the buyer. This is not required in a stock transaction. |
If the purchase price exceeds the aggregate tax basis of the assets being acquired, the buyer receives a stepped-up basis in the assets equal to the purchase price. |
In a stock transaction the buyer can normally obtain the selling company's nonassignable contracts, permits, and licenses without the consent of the other party to the contract, permit, or license. |
By purchasing assets rather than stock, the buyer avoids the problems presented by minority shareholders who refuse to sell their shares. |
Asset purchases do not qualify for tax treatment as a tax-free reorganization. |
Purchasing a business through an asset acquisition is less complicated from a securities law perspective because the parties are not normally required to comply with state and federal securities laws and regulations. |
If the selling company does not have a large number of shareholders, a stock transaction will normally be less complicated. |
Goodwill can be amortized by the buyer for tax purposes over a period of fifteen years. |
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. |
Have an Attorney Help You with Your Asset or Stock Purchase
As you can see, there are several key advantages and disadvantages to asset and stock purchases. While this may all seem a little complicated, it doesn't need to be -- and seeking legal counsel could really pay off. Talk to a small business lawyer to help you further understand the differences and answer any important questions you may have.
