When you sell or buy an existing business, you may have the option of pursuing an asset or stock sale. An asset sale centers around purchasing a company’s assets and liabilities. A stock sale, however, occurs when the shares of a corporation are bought or sold. It is essential to recognize that as a sole proprietorship or partnership, you will not have the option of a stock sale. Those business structures mentioned above are not structured to have stocks.
An asset sale involves the acquisition of:
- Equipment
- Trade Secrets
- Existing supplies and inventory
- Licenses
The above list is not exhaustive, and the buyer or seller may not be interested in all of the company’s assets.
The Benefits
As a seller, even if you choose to sell your assets, you still have legal control over the company. If you have an LLC, you and your attorney can take the appropriate action to dissolve the business, but an asset sale does not accomplish that. Depending on how much you sell the assets for, you have the potential to declare them as terminal losses. This occurs when you sell the asset for less than its tax-carrying value. This is different from a capital loss, but you may be able to claim these on your taxes.
Buyers may pursue asset sales because they may only want specific assets, such as a piece of intellectual property. Because they are not buying the company, they are also not taking on legal liability. For example, suppose a buyer is purchasing components of a company that builds homes. In that case, a previous customer cannot initiate a lawsuit against the person who merely bought assets from that home-building company.
The Drawbacks
The drawbacks for a seller mainly center around taxes. Typically, they can expect to pay more on taxes after an asset sale, whereas the buyer can take measures to limit their tax burden. Sellers who intend to dissolve their business also have to deal with the remaining assets and liabilities that the buyer doesn’t want.
Regarding buyers, these sales can take considerable time, especially if titles have to be transferred. Because we mentioned intellectual property previously, it is important to note that the transfer of it may require you to file the transfer with the appropriate government agencies. Depending on what the buyer is acquiring, they may be forced to accept certain liabilities and renegotiate contracts with third-party vendors and employees.
Speak With a Business Law Attorney Today
At Fraser, Wilson, & Bryant, P.C., we have decades of combined experience assisting current and future business owners. We pride ourselves in delivering first-class legal services for contract reviews and development, drafting buy-sell agreements, and business formations. To speak with one of our business law attorneys, contact us today to set up a free consultation.
