If I’m selling my business, what’s the difference between an asset sale and a stock sale?
When considering to sell your business or to buy a business, it is important to know the difference between an asset sale and a stock sale. Generally, buyers prefer asset sales and sellers prefer stock sales.
What is an asset sale?
In an asset sale, the seller retains possession of the legal entity, and the buyer purchases individual assets of the company. Individual assets can include equipment, fixtures, leaseholds, licenses, goodwill, trade secrets, trade names, telephone numbers, and inventory. In asset sales, the seller retains the long-term debt obligation, while the buyer purchases the specific assets in the company but not the company itself. Further, normalized net working capital can be included in a sale. This includes accounts receivable, inventory, prepaid expenses, accounts payable, and accrued expenses.
What is a stock sale?
A stock sale allows the buyer to purchase the seller’s stock directly. Unlike an asset sale, the buyer in a stock sale obtains ownership in the seller’s legal entity. In a stock sale, the buyer, essentially, steps into the shoes of the seller. However, the assets and liabilities acquired in a stock sale are often similar to that of an asset sale.
Are there limitations on whether a sale can be an asset sale or a stock sale?
Yes. If you are considering purchasing or selling a sole proprietorship, a partnership, or a limited liability company (LLC), you will not be able to conduct a stock sale. This is because none of these entities have stock in their company/business structures. However, owners can still sell their partnership or membership interests.
If the company is structured as a C-corporation, the buyer and seller may decide to structure the sale as a stock sale or as an asset sale.
Are there tax consequences to consider with asset and stock sales?
Yes, there may be tax consequences to consider in both asset and stock sales.
In asset sales, the tax consequences depend on the structure of the company or business you’re either buying or selling. For example, a C-corporations pay taxes on its income, and they have two levels of taxation. The first tax will be at the corporate rate when you (seller) receive the proceeds of the sale, and again at the individual rate of the distribution to shareholders, or paying dividends to shareholders.
If you are selling an S-corporation, limited liability company, or partnership, you will only be taxed once. S-corporations pay taxes on the company’s income. You will only pay when the gains are passed through to the owners.
The taxation in asset sales affects the sellers more than the buyers. Buyers are motivated by asset sales because every asset they purchase will be valued as of the date of the acquisition. Buyers also receive a “restart” of depreciation and amortization schedules, which can be a valuable tax break. Neither of these benefits is available in stock sales, which is why buyers generally prefer asset sales.
Stock sale taxation is more straightforward than asset sale taxation. The first thing you will need to do is to determine the “taxable gain.” The taxable gain is the purchase price of the stock minus the shareholder’s basis in the stock. This gain is taxed at the capital gains tax rate.
Navigating through an asset or stock sale can become complicated and you may need an attorney to assist you through the process and navigate you towards success in your transactions.
This post was created by Joseph Dudley and Christopher Boline, business and tax attorneys at Dudley and Smith, P.A. Mr. Dudley and Mr. Boline have worked with clients and businesses in both asset and stock sale matters. If you have questions about asset or stock sale processes, please contact Mr. Dudley at 651-291-1717 or by email at JDudley@dudleyandsmith.com, or please contact Mr. Boline at 651-291-1717 or by email at email@example.com. Dudley and Smith, P.A. is a full service law firm with offices in St. Paul, Blaine, Bloomington, Burnsville, Chanhassen, White Bear Lake, and Woodbury.
The law is continually evolving and Dudley and Smith, P.A.’s blog posts should not be relied upon as legal advice, nor construed as a form of attorney-client relationship. Postings are for informational purposes and are not solicitations, legal advice, or tax advice. A viewer of Dudley and Smith, P.A.’s blog should not rely upon any information in the blog without seeking legal counsel.