Should I Buy Stock or Assets?

The structure of a business acquisition has significant tax and liability implications for the buyer.  When you buy the assets of a business, you are able to allocate the purchase price among the acquired assets and step-up the basis of such assets for depreciation purposes accordingly.  The increased depreciation deduction resulting from the stepped-up basis helps the buyer protect future business income from taxation.

Buying assets rather than stock generally protects the buyer from liabilities of the selling corporation.  In an asset transaction, the buyer is generally liable only for those liabilities which the buyer expressly assumes. 

For both of these reasons, buyers generally prefer an asset deal and are willing to pay a higher purchase price if the deal is structured as an asset acquisition rather than a stock deal.  On the other hand sellers are generally better off if the deal is structured as a stock sale.

When the owners of a “C” corporation sell assets, the corporation is subject to tax at ordinary income rates on the gain realized on the sale of assets, and the owners then pay tax at capital gain rates on the sales proceeds distributed to them.  But if the owners sell the stock of the corporation, the owners are only taxable once on such sale, and such sale is taxable at capital gains rates.  Moreover, if the owners sell stock, all of the liabilities of the business remain with the corporation and in effect become the responsibility of the buyer.  For these reasons, sellers generally prefer to do a stock deal and will accept a lower purchase price if the deal is structured as a stock deal.

If you are considering buying a business, or need assistance with negotiating the deal or drafting the acquisition documents, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.  The double tax effect of selling assets is eliminated if the selling corporation is an “S” corporation rather than a “C” corporation.  So owners of a “C” corporation who are considering selling the business in the future should consider converting to an “S” corporation.  There are certain built-in-gain rules which are intended to tax gain on sale of assets by an “S” corporation which was previously a “C” corporation.  But with some planning, the built-in gain tax can be reduced or eliminated.  If you want to know more “S” corporations or built-in gain, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

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Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

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