By Susan Buckner, J.D. | Legally reviewed by Susan Mills Richmond, Esq. | Last reviewed April 10, 2024
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Selling a business is confusing and time-consuming. The parties must choose between an asset sale and a stock sale. Both types of sales have advantages and disadvantages.
In stock sales, buyers purchase the shareholders' stock and direct ownership in the business entity. Small businesses, such as sole proprietorships, may not meet all requirements for a stock sale. Larger companies favor stock sales because they can keep control over intangible assets.
In an asset sale, the new owner purchases the business's physical assets. The seller retains all rights to the legal entity. The buyer purchases the assets, including equipment, fixtures, and goodwill.
This article reviews what small business owners need to complete an asset purchase of their business. Visit FindLaw's Closing a Business page for more information on dissolving your company.
In an asset sale, the buyer purchases the business assets. The buyer may acquire the entire business in the sale, but the fair market value determines the selling price of the tangible and intangible assets.
The assets of the business can include:
In an asset sale, the seller may face double taxation. Intangible assets may be subject to capital gains tax. Tangible assets are taxed at ordinary income tax rates, and taxes depend on whether your state has an income tax. C-corporations' owners may face another round of taxation when the assets move outside the company.
The IRS views the sale of a business as the sale of multiple assets. The IRS values and taxes each item separately for tax purposes. Depreciation plays an important role for the buyer and seller, so the services of a qualified professional are essential.
Since asset sales dispose of each asset individually, buyers can purchase items they want. For instance, suppose a furniture wholesaler provides office sets to small businesses. A buyer may buy the accounts receivable, but not the inventory, if the buyer wants to upgrade the stock. The seller can have a liquidation sale for their profit.
In most cases, buyers purchase assets and leave the seller the liabilities. The seller uses the profit from the sale to wind up the business and pay off the liabilities and debts. There may be instances where the buyer handles future liabilities, such as taxes or product liability lawsuits.
Buyers should carry out their due diligence on any company before sale. Unless your purchase agreement tags the seller with these possible liabilities, you could be on the hook for any potential legal action.
When you purchase or sell an asset, you must retitle all property in the new owner's name. This includes leases and equipment titles. For instance, a pizza shop must retitle any delivery vans and pizza ovens in the name of the new business. Since they have experience with title transfers, the process is easier for your attorney.
The sale of assets requires a fair valuation of the property, including any real estate. Your attorney should explain the tax implications of including real property in your asset sale. Depending on your state laws, transfer tax or capital gains tax may figure into the sale.
In any business transaction, an attorney should review the documentation before the parties complete the deal. Your attorney can also perform due diligence on the selling and purchasing companies and carry out any necessary title checks.
Asset sales have benefits and liabilities for entrepreneurs looking for ways to purchase a business. Small business owners should have a knowledgeable business and commercial law attorney to help with tax laws and other matters.
Contact a qualified business attorney to help you tie up all loose ends when closing your business.
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