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Asset Purchase vs Stock Purchase

The two ways to buy a business - buying what it owns or buying the entity that owns it - and why the choice decides which liabilities come with it, which contracts transfer, and how the price is taxed.

Informational only - this is not legal advice. These definitions explain general legal vocabulary in plain English. They are not advice about your situation, reading them creates no attorney-client relationship, and the law differs from state to state and changes over time. For advice you can rely on, speak to a lawyer licensed in your state.

What it means

A business changes hands in one of two ways. In an asset purchase the buyer acquires specific things the business owns - equipment, inventory, contracts, intellectual property, goodwill, a lease - and leaves the selling entity in the seller's hands, along with any liabilities the buyer did not expressly assume. In a stock purchase (or, for an LLC, a membership interest purchase) the buyer acquires the entity itself, and everything the entity owns and owes comes with it, known and unknown. Buyers therefore generally prefer assets and sellers generally prefer stock, and much of the negotiation is about which side's preference wins and at what price.

The differences are practical. In an asset deal each contract, licence and permit must be transferred, and many cannot be assigned without the other party's consent; employees are terminated and rehired; and the buyer usually gets a stepped-up tax basis in what it bought while the seller may face two levels of tax if it is a corporation. In a stock deal the entity's contracts, licences and employment relationships continue undisturbed, and the seller typically receives capital-gain treatment, but the buyer inherits every liability, which is why stock deals carry heavier representations, warranties, indemnities and escrows.

An asset deal does not always leave liabilities behind. Under successor liability doctrines a buyer of assets can be held responsible for the seller's obligations where it expressly or impliedly assumed them, where the transaction was in substance a merger, where the buyer is a mere continuation of the seller, or where the deal was structured to escape creditors; some states add product-line and environmental variants. Unpaid state taxes commonly follow the assets unless a tax clearance is obtained before closing.

Where this comes from

The structure of a business acquisition is a matter of state entity, contract and tax law and of the federal tax code. Successor liability and its exceptions are state common law, restated in decisions such as Ray v. Alad Corp., 560 P.2d 3 (Cal. 1977) (product-line exception). Federal tax treatment of the two structures is set by the Internal Revenue Code, including § 1060 (allocation of consideration in an asset acquisition) and § 338 (elections to treat certain stock purchases as asset purchases), 26 U.S.C. §§ 338 and 1060. Bulk-sales notice requirements, where they survive, are in each state's tax code.

When people hire a lawyer for this

The structure question should be put to a lawyer and a tax adviser together before a letter of intent is signed, because it is decided there and is expensive to reopen. A buyer of assets should ask specifically which contracts need consent to transfer and which state liabilities follow the assets; a seller of stock should expect the buyer to demand indemnities and a holdback and should understand exactly what those cover and for how long.

Find a lawyer for this in your state

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Part of the LawyerLand plain-English legal glossary. Definitions are written from primary sources - statutes and court rules - and each entry states the authority it rests on, or says plainly when the doctrine is state law with no national rule.

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