In an asset purchase, the buyer purchases some or all of the assets of the business. The buyer does not acquire an ownership stake in the company that owns those assets, only the assets themselves. This method generally favors the buyer because any existing liabilities that the business may owe are not transferred to the buyer. Such liabilities could include contracts, lease obligations, issues with employees and tort liabilities for negligence, among other obligations.
In an entity purchase, also known as a stock purchase, the buyer purchases the company that owns the business. That may mean buying all of the stock in a corporation, all of the membership interests in an LLC, or all of the partnership interests in a partnership, depending on how the company is structured. This type of purchase generally favors the seller because the buyer assumes any existing liabilities, known or unknown.
Tax implications of buying or selling a business
For tax purposes, if you are buying a business, an asset purchase is usually to your advantage. In an asset purchase, you can obtain a stepped-up tax basis in the purchased assets, which can create opportunities for tax write-offs. If you purchase a business entity, you are acquiring the fully or partially depreciated value of the assets, which does not affect the tax basis.
As a seller, your tax interest is just the opposite, and an entity purchase is usually advantageous. This is because you can report the entire gain from the sale as a capital gain on your tax return. In an asset sale, you may have to report large amounts of ordinary income rather than capital gains because the assets may have depreciated or be subject to recapture. Moreover, if your business is a corporation, stockholders may be subject to double taxation.
In addition, remember that an entity purchase transfers any existing tax liabilities from the seller to the buyer, whereas an asset purchase generally does not. For example, if the business owes back taxes, then in an asset purchase, those taxes would remain the responsibility of the original owner. An entity purchase, on the other hand, would make those back taxes the responsibility of the new owner.
How a tax lawyer can help you move forward
If you're considering buying a business, consulting an experienced attorney can make a huge difference. For example, an attorney can help you investigate the business entities involved to make sure they are in good standing. We can thoroughly research any judgments, liens and bankruptcies that might affect the business you are buying and insist that they be resolved before the purchase is completed.
Whether you are buying or selling a business, it is imperative that you have good legal advice throughout the process. The terms of a purchase and sale are always negotiable between the buyer and seller, and a strong legal advocate in your corner will help you reach an agreement that meets your needs and minimizes your tax liability.
Don't go into a business purchase or sale alone. Trust the business tax attorneys at Brown, Naegle, Crider & Jensen LLC to protect your interests. Contact us today to find out what we can do for you.