Legal Corner

-List Your Site Here! -- Targeted Advertising For Just Pennies A Day! -Tell A Friend - Bookmark This Page

LegalCorner.netTM - Useful Articles On None -   Business Law

Find A Lawyer
Law Area:




Search By:


Related Articles

Stock Purchase Agreement vs. Asset Purchase Agreement

Buying A Business?

Stock Purchase Agreement vs. Asset Purchase Agreement
©2019, Melissa C. Marsh.
Written: 5/31/2002  
By: Melissa C. Marsh


Although there are many ways to structure the purchase of a business, one fundamental question with great implications will be whether the deal will be structured as a stock purchase or an asset purchase. Since the choice will have far reaching implications for both the buyer and seller of a business, oftentimes other elements of the deal structure will be adjusted to make up for this fact.

Using A Stock Purchase Agreement to Sell A Business

A stock purchase generally involves the purchase of an entire business such as a corporation, including all of the corporation’s outstanding shares of stock. If a sole proprietorship, partnership or a limited liability company, the term used (here “stock purchase”) would be slightly different. In a Stock Purchase, the buyer in effect steps into the shoes of the seller, and the operation of the business continues in an uninterrupted manner. Unless there is a written agreement to the contrary, the seller will no longer have a continuing interest in, or obligation to, the business assets, liabilities or operations. From an accounting perspective, the assets and liabilities of the business remain and continue to be carried and/or depreciated in the same manner as before the transaction. From a tax perspective, the seller recognizes a gain or loss based on the difference between the sales price and his or her current basis in the stock. For this reason (the gain/loss) and the fact that the seller will have no further responsibilities regarding the business’s liabilities, seller’s generally prefer an asset purchase over a stock purchase. If the transaction is structured as a stock purchase, the buyer should perform additional due diligence to ensure awareness of all assumed liabilities.

Using An Asset Purchase Agreement To Buy A Business

When the purchase of a business is structured as an Asset Purchase, the buyer will either create a new entity or use another existing entity to effectuate the purchase and sale because only those assets and liabilities specifically identified in the purchase agreement are transferred to the buyer. All of the other assets and liabilities remain with the existing business (seller). In this type of transaction, the seller retains his or her ownership of the shares of stock or membership interest in the company to be sold and the buyer will either form a new enity or use another existing entity to effectuate the purchase and sale.

From an accounting perspective, the buyer records the assets and liabilities at the fair market value assigned to the buyer as part of the transaction. This may increase or decrease the carrying value and/or amount of annual depreciation with respect to individual assets and liabilities. From a tax perspective, the existing business recognizes a gain or loss based on the difference between the sales price and the carrying value of the assets and liabilities.

Asset Purchase transactions are generally more complicated because the ownership of the assets and liabilities and any related contracts must actually be transferred, sometimes through the filing of documents with governmental offices which may involve additional fees. Other considerations include the possible transfer of the corporate name, trade names, fictitious business names, trademarks, and the rehiring of employees by the buying entity. In addition, where the asset purchase involves the sale of all, or substantially all, of the selling business’s assets, your state’s “Bulk Sales" laws must be complied with. These laws generally require the buyer to notify of all of the selling business’s creditors of the proposed sale of the business assets.

Which One SHould I Use: A Stock Purchase Agreement or Asset Purchase Agreement?

Sellers will generally prefer a Stock Purchase because it allows them to completely step away from the business and any future obligations with respect to the business. In addition, Stock Purchase transactions generally enable the seller to pay taxes at the lower capital gains rate. In an Asset Purchase involving a corporation, the seller may face double taxation because the corporation will have to pay tax on the gain from the sale of the asset and then pay tax when and if the proceeds are distributed to the selling owner.

Conversely, buyers generally prefer Asset Purchase transactions, because the buyer can select which assets to acquire and which, if any, liabilities to assume. This is particularly important to a buyer if the business has a significant number of actual or potential liabilities, and it is difficult to quantify the amount of those liabilities. As discussed above, a buyer should perform additional due diligence if the deal is structures as a stock purchase.


As this discussion indicates, the decision on whether to structure the purchase or sale of a business as a Stock Purchase or an Asset Purchase involves numerous factors which can impact both the buyer and the seller quite differently. Both parties should consult their professional advisors at a very early stage of the process to insure that they fully understand the issues before making their decision.

© Copyright 1999-2019 Melissa C. Marsh. All Rights Reserved. All Information on this website is subject to a Disclaimer and Use Agreement. This information is provided as general information only and should not be construed as legal advice. We advise you to seek the advice of competent legal counsel to address your own specific questions, facts and circumstances.

All information on this site is subject to a Disclaimer and Use Agreement

© Copyright 1999-2019 Melissa C. Marsh. All Rights Reserved