If you are considering a sale of your business, there are two common types of sales that you will likely have to choose from: selling the stock of the company or selling the company’s assets.
Weighing out the pros and cons is important, as each varies widely with how you will be taxed and how the buyer will write off the purchase on their tax return. When it is time to decide, trust in a reputable business lawyer to guide you through the process.
In an asset sale, an existing company purchases the assets of the selling company. In most cases, the selling company sells all or substantially all of its assets, although sometimes certain assets are excluded from the sale or the buyer purchases only specific assets. Working capital can be included in the sale, as well as inventory, prepaid expenses, and accounts receivable. One major difference between a stock sale and asset sale is that the buyer typically does not acquire the existing liabilities of the selling company.
By doing an asset sale, the owner of the selling company continues to own the entity, although depending on the scope of the sale, it will likely end up worthless. The seller would likely wind up its affairs, pay liabilities, make any distributions, and typically dissolve.
The asset sale is a very flexible type of agreement for buyers. Since they are only purchase the assets (and any liabilities) they want, buyers retain a lot of control in an asset purchase.
A stock or entity sale refers to the sale of all shares of stock (or membership interests in a limited liability company) to another individual or entity. The buyer acquires all of the equity in the company, along with all of the company’s assets and liabilities. Unlike an asset sale, the buyer in a stock sale takes on all current liabilities, along with any future liabilities and claims. The buyer should perform rigorous due diligence before closing since there are potential legal claims that can arise from existing and potential future liabilities of a company.
As you can imagine, sellers generally prefer stock sales, as they are able to free themselves from potential claims and liabilities. There are benefits for the buyer in an entity sale, including acquiring intangible property such as licenses and permits. Still, buyers prefer asset sales as they can avoid taking on the potential liability that comes with an stock sale.
The Tax Implications
If you are considering a business sale, take into account the tax advantages and disadvantages that come along with each method.
In an asset sale, buyers typically receive depreciation benefits sooner than they would with a stock sale. If the purchase cost of the assets is more expensive than their tax basis, the buyer could receive a stepped-up basis for those assets. In a stock sale, the seller could receive a tax advantage since the capital gains are taxed at a much lower rate than ordinary income.
As Florida has no state income tax, there are also no state-level capital gains. However, if you earn money from investments (or in this case the sale of your company), you may still be subject to the federal capital gains tax. If your business is based in multiple states, you may also have to pay capital gains in another state.
It’s important to note: capital gains taxes vary based on whether the money comes from short- or long-term holdings. You’ll want to consult a tax professional in addition to your experienced business attorney to understand all the tax and legal implications of your unique situation to best structure the sale.
To recap what sets these two types of business sales apart:
- A sale of corporate stock shares, or ownership interests, in a company.
- Typically preferred by sellers.
- Buyers take over all assets and liabilities, current and future.
- Sellers are subject to potential capital gains, which are taxed at a lower rate than ordinary income. In Florida, there are no state-level taxes, but federal taxes may apply.
- A sale of all or substantially all of a company’s assets, but usually not any of the liabilities of the business.
- Generally preferred by buyers.
- Sellers may be subject to income taxes, usually at a higher rate than capital gains. Here in Florida, there is no state-level income tax, but federal taxes and other states taxes may apply to your business sale.
Contact The Frazer Firm
Exploring the right route for your business is a very calculated process. If you are interested in selling your business, it is essential that you contact an experienced business lawyer to lead you through the process and help you make the best decision for your specific goals.
Having the right legal team ensures nothing gets left behind and allows you to have peace of mind. It’s our goal as your counsel to make selling your business as simple as possible. Schedule a consultation with The Frazer Firm today: 561-295-1551.
Multi-member LLCs always have to grapple with the issue of dealing with an unruly, unlawful or otherwise dysfunctional partner. Unfortunately,…