If you’ve reached a point in your journey where you want to sell your business or you’re gearing up to sell in a year or so, you’ll be faced with a couple of options. You could structure your sale as an asset sale or as a stock sale, two different and opposing structures that can benefit the parties involved in differing ways. Generally, buyers prefer asset sales whereas sellers prefer stock sales. This reason alone can make it quite complicated to figure out which structure to utilize for your business sale, which is why it is always a good idea to consult a tax advisor or financial planner in preparation for this big step!
And so, this article highlights what each type of sale is, some primary differences between the two structures, and how each structure can impact your tax liabilities and thus your bottom line.
What is a Stock Sale?
This type of business sale is where a company’s shareholder sells their existing stock to a new owner. With a stock sale, the buyer ends up obtaining all company equity, including all assets and also liabilities. This is why buyers don’t particularly favor this type of sale because they take on any risk or unpaid liabilities from the shareholder in the sale.
It’s also important to note that not all businesses are eligible for a stock sale. A sole proprietorship, partnership, or LLC does not issue stock. When these business types are sold, the buyer takes on full ownership.
What is an Asset Sale?
On the other hand, we have an asset sale. And this involves the selling of individual assets or liabilities, with the seller required to transfer their individual assets at their market values. The buyer has control over which liabilities come along with the purchase and they can refuse liability for any or all undisclosed or unknown debts. They also have control over which assets are included in the sale, and which aren’t. The buyer can decline to include an asset in the sale if they see it as having no value.
Which is a Better Option for the Business Owner Selling the Business? Considerations
When it is an option, many sellers will prefer a stock sale to an asset sale for a number of reasons:
Documents are simpler and fewer – There’s no extra negotiation over contracts with customers involved in a stock sale, it’s a relatively straightforward purchase process. It’s a transfer of stock rather than assets, which can be a more complicated process.
Tax treatment – One of the major advantages of a stock sale over an asset sale is that you, the seller, are not subject to double taxation as you would be if you structured your sale as an asset sale. The business pays a capital gains tax at the entity level if the assets have appreciated, and then the individual shareholders are also subject to a second tax when the sale proceeds are distributed to them as dividends.
Don’t need to consider impacts of C-Corps and S-Corps – With a stock sale, the structure of the business doesn’t necessarily affect the purchase as it’s a transferring of stock rather than the assets of the business. This also links back to the favorable tax treatment as the tax liabilities associated with the purchase of a business are more heavily geared toward an asset type sale.
No third party consents – Contracts, permits and licenses can often be transferred over to the buyer without the need for third-party consents, whereas in an asset sale, consent would be needed. This is again adding to the ease and simplicity of the transaction because there won’t be any third parties slowing or blocking the business purchase.
Buyer is subject to liabilities – Because a stock sale involves a buyer obtaining all company equity, this means a seller also hands over any future liabilities in the form of product liability claims, contract claims, or employee lawsuits, for example.
How Does Each Sale Type Impact Your Tax Liability?
We’ve already mentioned some of the tax treatment that comes with a stock sale, but how do the two sale types directly compare when it comes to your tax liability?
With a stock sale, you’re taxed at a lower capital gains rate. Whereas with an asset sale, you’d be subject to double taxation. If the business sold is a C-Corp, the seller faces a double taxation. The business pays a capital gains tax at the entity level if the assets have appreciated, and then the individual shareholders are also taxed when the sale proceeds are distributed to them as dividends.
When in Doubt, Consult Your Tax Advisor
Selling your business, or even starting to think about selling it, can be quite the daunting task! That’s why we always recommend you sit down with your tax advisor or accountant and legal team to really figure out which sale type is the best and most fitting for you and your business.
Simple Startup is on hand to support you with this big decision and its resulting financial impact. We can provide fractional financial support in the form of business valuations and be on hand for any ad-hoc consulting and tax advisory needs. If you have any questions or simply don’t know where to start, grab some time on our calendar and see how we can help in preparing your business for its future.