Professional Corporation
Buying a U.S. Business: Asset Purchase vs. Stock Purchase
· Dow & Sohn CPAs · Opus Advisors
When acquiring a restaurant, franchise, distribution company or other U.S. business, revenue and purchase price are only part of the decision. What you buy—and how you buy it—can change the tax outcome, exposure to historical liabilities, and process for transferring contracts and licenses, even when the business and price are the same.
The two common structures are an asset purchase and a stock purchase. Buyers often favor an asset purchase, while sellers often prefer a stock sale. The better approach depends on the company’s tax classification, asset mix and contractual requirements.
1. What is the difference?
In an asset purchase, the buyer acquires specified assets such as inventory, equipment, trademarks, customer relationships and goodwill. The agreement identifies the assets acquired and liabilities assumed, helping limit exposure to historical debts and disputes. Exceptions, including tax successor liability, mean an asset purchase does not eliminate every historical risk.
In a stock purchase, the buyer acquires ownership of the company. The legal entity continues to exist, and its assets, contracts, unpaid taxes, litigation and employee obligations remain with it. Financial and tax due diligence, representations and warranties, indemnification and an escrow holdback are therefore important risk-management tools.
2. Why buyers often prefer an asset purchase
The purchase price is allocated among acquired assets to establish the buyer’s new tax basis. When that basis exceeds the seller’s existing adjusted tax basis, the buyer receives a step-up. This is a tax-basis determination, not permission to arbitrarily increase financial-statement book values.
The allocated cost is recovered according to the type of asset. Equipment is deducted under applicable depreciation rules, and acquired goodwill and other qualifying Section 197 intangibles are generally amortized over 15 years. Land is not depreciable. Buyer and seller should agree on a consistent allocation and file Form 8594 when required.
In a conventional stock purchase, the amount paid generally establishes the buyer’s basis in the shares. The company’s underlying asset tax bases usually remain unchanged. Paying a new acquisition price does not, by itself, increase the company’s depreciation deductions.
3. The seller’s tax outcome depends on entity classification
When a C corporation sells assets, gain may be taxed at the corporate level. A later dividend or liquidating distribution of the proceeds can create additional shareholder-level tax. A direct stock sale generally taxes the shareholder’s stock gain instead, avoiding the asset-sale structure’s potential double taxation.
An S corporation or an LLC taxed as a partnership generally passes income through to its owners. However, the character of the gain varies by asset: inventory gains and depreciation recapture may be taxed as ordinary income. How much of the price is allocated to equipment, inventory and goodwillcan therefore affect the seller’s after-tax proceeds.
An LLC is not a single tax classification. Its actual tax treatment and the structure of the interest acquisition must be reviewed first. An S corporation may also face entity-level tax in certain circumstances, including issues arising from a prior C corporation history.
4. Check whether contracts and licenses will continue
An asset acquisition may require assignment consent or replacement agreements for leases, franchise agreements and major supply contracts. Signing the purchase agreement does not ensure uninterrupted operations if the landlord or franchisor has not approved the transfer.
In a stock acquisition, the contracting entity remains in place, but a change-of-control clause may still require consent. Licenses should not be assumed to continue automatically. California ABC transfer procedures can apply to certain changes in equity ownership, even when the license-holding entity remains the same.
5. Some stock transactions can receive asset-sale tax treatment
If the applicable requirements are met, a Section 338(h)(10) or 336(e) election can treat a legally structured stock transaction as an asset sale for tax purposes. These elections may be considered for S corporation sales or certain subsidiary sales and can provide an adjustment to the buyer’s underlying asset tax bases.
The deemed asset sale also affects the seller’s taxes, so the election is not automatically beneficial to both sides. Eligibility, ownership thresholds, required consents and filing deadlines must be checked, and any additional tax cost should be considered alongside the negotiated price.
6. Additional California considerations
Sales tax successor liability: A buyer may become responsible for a seller’s unpaid sales taxes and related amounts. Review the CDTFA Tax and Fee Clearance process and arrange to withhold sufficient purchase funds where required. Using escrow alone does not eliminate successor liability.
Property tax reassessment: Acquiring an interest in a real-estate-owning entity can trigger reassessment even without a direct property transfer. A person or entity acquiring more than 50% control, directly or indirectly, may trigger the rule. Review whether Form BOE-100-B must be filed within 90 days of the relevant change in control or ownership.
Review the structure before negotiating the final price
Buyers should evaluate future deductions and assumed risks; sellers should focus on proceeds remaining after tax. The ability to transfer leases and licenses should also be addressed early.
Once the structure and allocation have largely been negotiated, changing them can be difficult. Coordinate tax, accounting and legal review at the letter-of-intent stage, before the transaction terms become difficult to revise.
Dow & Sohn CPAs · Opus Advisors supports acquisition and sale decisions through transaction tax analysis, financial and tax due diligence, purchase-price allocation, and post-acquisition accounting and tax planning.