Brooklyn Small Business Lawyer: Advantages of Asset vs. Stock Sales When Buying or Selling a Small Business
One of the most important considerations when buying or selling a small business is whether to structure the sale as an asset sale or a stock sale. Usually, the seller will prefer a stock sale, while the buyer will prefer an asset sale. Generally, small businesses are sold as asset sales. Stock sales are more common for larger business transactions.
Simply put, an asset sale is when a buyer purchases individual assets of the company, such as equipment, licenses, fixtures, leaseholds, vehicles, trade secrets, inventory and customers’ names and contact information. In a stock sale (also called an equity sale), the buyer purchases the business owner’s shares of the corporation.
If your business is a sole proprietorship or partnership, you are restricted to conducting an asset sale because your business entity is not structured so as to have stock. If your business is a corporation, the buyer and seller must decide together whether to structure the deal as an asset or stock sale. While an LLC does not have stock, it is possible to transfer ownership of the LLC interest; similar to a stock sale.
Asset Sales Benefit the Buyer
Consider the following ways an asset sale benefits the buyer:
- Accounting/tax issues – Everything the buyer purchases will be valued on the date it is acquired. This is referred to as “stepped-up cost basis.” This is a value to the buyer should they later decide to sell any of the assets they are acquiring in the transaction. The seller, on the other hand, is subject to less favorable tax treatment. Specifically, S corporations, LLCs, and partnerships are taxed at the individual rate, which is higher than the capital gains rate that would be applied to a stock sale. C corporations are double taxed—first at the corporate rate when proceeds of the sale are realized, then again at the individual rate on the distribution to shareholders.
- Liability – In an asset sale, the buyer can specify what liabilities it is willing to assume. Typically, the buyer does not inherit potential liabilities, such as product liability, contract disputes, warranty issues or employee lawsuits.
- Debt obligations – The seller usually retains all long-term debt obligations.
- Employees – Typically a buyer has the option but not the obligation to hire the employees of the seller’s business.
- Majority rule – Business owners need not unanimously agree to sell the business—a majority vote is sufficient.
Stock Sales Benefit the Seller
Consider the following ways a stock sale benefits the seller:
- Accounting/tax issues – The seller pays a lower capital gains tax rate rather than the higher ordinary income tax rate.
- Liability – The seller is usually absolved of more risk. The buyer assumes all liabilities unless specifically excluded, including future lawsuits, environmental liabilities, OSHA violations and employment disputes.
- Unanimous rule – All shareholders must be willing to sell their shares for a buyer to acquire the entire business.
- Insurance issues – For better or worse, the buyer keeps liability, unemployment and Workers’ Compensation insurance ratings.
As every situation is unique, this general overview is not intended to provide legal or tax advice. Getting professional advice from an experienced small business attorney is critical to protecting your interests.
Brooklyn Business Lawyer Regina Gordon Assists Small Business Owners With Asset and Stock Sales
If you are considering buying or selling a small business in New York, Regina Gordon Law Office can advise you whether to pursue an asset or stock sale, and help you execute the transaction. We serve clients online throughout New York State, including Long Island, New York City (NYC), Brooklyn, Manhattan, Queens, Bronx and Staten Island. To discuss your situation, contact us at 347-770-7507 or submit an online inquiry today.