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Selling a Business: Asset or Stock, Which is Right for You?

Posted by attorney Todd Gallinger

Perhaps you have worked hard for many years and are now ready to retire, or maybe you started your business with a clear goal to sell it after building up its value. Either way, you have concluded that it is time to sell your small business.

When selling a small business, there are several different options for how to structure the sale. The two main choices are to sell the assets of the business or, if the business is a corporation or LLC, to sell the stock in the company. In an asset sale, the business will generally sell all of its property to a buyer.

This property often includes the right to assume contracts and also the goodwill of the business. It is important to check major contracts, particularly leases, to see if they can be assumed. Oftentimes, the other parties, such as a landlord or vendor, will need to approve the buyer taking over the contract.

Buyers often prefer to do an asset sale because of reduced liability. If purchasing the corporation outright, unknown past creditors could appear seeking payment from the new owner. Structuring the sale as an asset sale will serve to limit the buyer’s liability for past debts, particularly if notices are published pursuant with the Bulk Sales Act. Sellers, however, often prefer to structure the business transfer as a stock sale. In a stock sale, the seller’s entire profit is treated as capital gains.

In an asset sale, the seller would have to work with his accountant to identify the class of each asset sold, and then determine the tax treatment for each. Of course, creative sellers can take certain actions to encourage buyers to purchase the business as a stock sale. They can offer an indemnity agreement for past liabilities, meaning they agree to be financially responsible. If the buyer is particularly concerned, part of the sale’s price could even be left in escrow in order to pay for any lawsuits or debts that arise. If none arise within the time period agreed to by the parties, then the money is transferred to the seller.

Structuring a deal this way might permit the seller to save thousands on taxes while still protecting the buyer. The tax savings of the seller may even be so great that it would be worth lowering the price of the business. The tax savings may be great enough that it is even worth creating a corporation if you have been operating the business as a sole proprietorship, though this can be complex. This is just one of many options you have when transferring your business and this should not be considered legal advice.

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