In simple terms, a stock purchase may require only that the selling shareholders swap their stock certificates for a check from the buyer. In contrast to an asset purchase, the buyer is actually taking over the seller's store and not just purchasing the merchandise. In essence, the buyer steps into the shoes of the selling shareholders. The result can be a seamless change of ownership. The "store" may look like it is under new management but title to corporate assets and everything else can remain the same. Thus, there is a better chance of preserving the status quo. Employees can remain in place. It may not be necessary to change title to assets or assign existing contracts to a different business entity. Good will and other intangible assets remain with the seller's business.
All other things being equal, sellers will usually prefer a stock purchase agreement because of favorable tax consequences. They may be able to realize capital gains treatment on the sale of stock. This avoids "double taxation" that can result with an asset purchase where the business entity is first taxed on sales proceeds, and the shareholders are then taxed again on distributions that may then be made to them.
Buyers are wary of stock purchases because they end up assuming liabilities of the seller. Thus, a seller must anticipate that a buyer will expect some concessions. The buyer may, for example, insist on very strong indemnification language from the seller. The purchase price may also be adjusted accordingly.
Taxes can take a huge bite out of the money you receive for your business. It pays to know just how big that tax bite will be -- and to try to lower it if possible. Your tax bill will be influenced by two key factors: How your business is legally set up and -- in the case of a corporation or LLC -- whether you're selling the assets or the entity. Sales of all sole proprietorships and almost all partnerships are asset sales. So are the sales of many corporations and LLCs. Since the tax issues can get complicated, you may need help from a CPA or other tax expert.
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