A sale of business can happen in one of two ways. The person can buy a company stock as a stock sale or buy company assets as an asset sale.

Sale of Business Overview

Depending on whether it is a stock or asset sale, the tax consequences vary. Before deciding whether to structure a sale of a business as a stock, asset, or both, it's important to understand the consequences of the choices. 

Generally, the seller wants a stock sale of business, while the buyer prefers an asset sale of business for both liability and taxes. Both parties have to be aware of the consequences of entering a sale of business and the legal implications behind it.

The Asset Sale

This type of sale involves selling different assets:

  • Tangible: land, cash, investments, buildings, and inventory
  • Intangible: patents, copyrights, trademarks, and the goodwill of a business that has been built over the years

If a business is not incorporated, a sale of assets is the only option since there are no share certificates of ownership for a sale transfer. To come up with a good sale price, you have to individually appraise the different assets of a business.

For example, let's say you want to sell your dog treat business, if you create a list of assets, you will soon realize creating a list of all the assets and their value can be complex. How can you know that your business's goodwill is worth an exact amount and prove this to a potential buyer when it's an intangible asset? This is why it's important to seek the help of a professional to help you sell your business.

Sole Proprietary Asset Sales

When it comes to a sole proprietorship, it can become difficult for asset sales since the personal and business assets are not distinguished, and therefore, the transferring of assets can get tricky.

If the business has been done from home or from a building on the owner's land, selling the business can be tricky. The owner might wish to keep cars or equipment for himself, and by definition, a sole proprietary's value comes from the owner's skills and experience, which makes for an intangible sale that is hard to put a dollar price on.

Share Sale for Incorporated Businesses

Selling stock of an incorporated business makes matters simpler because you are selling shares of a business and not its assets. The business liabilities are included in the sale, and as a seller, you can rest assured you are clear of the business. In order to sell stock, you have to have an incorporated business.

Asset Sale Versus Stock Sale

  • An asset sale can be for any type of business, and a stock sale is only for an incorporated business.
  • You can choose what you're selling and what you are not in an asset sale, such as keeping the name of the business. In a share sale, the new owners keep the entire business, like the business name.
  • Liabilities are sold in a share sale, while only assets are sold in an asset sale, which means the original owner can still be held liable for the liabilities.
  • In a share sale, the entire price you paid for the business can be tax-free by using lifetime capital gains exemption, while this is not possible in an asset sale because assets are affected by Capital Cost Allowance.

Liability for Stock and Asset Sale

A buyer's liabilities for stock sale include warranties, tax implications, and defective products, while the seller lets go of the responsibilities of the business, as long as the securities regulations are applied.

The buyer would seek the following from the seller:

  • Seller warranties that the business meets specifications written in a contract and financial statement.
  • An indemnification agreement where the seller reimburses the buyer's extra costs if the warranties are not met.
  • A payment schedule over time from buyer to seller.
  • The option to use the stock seller's expertise by using part of the purchase price to have the seller provide operations advice.

The buyer would prefer an asset sale because he has greater control over liabilities. He or she can limit these liabilities post-sale or to assets acquired. This factors into why it would be more attractive for a buyer to have an asset sale.

If you need help with a sale of business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.