In an asset sale, the seller keeps the legal entity and the buyer purchases individual assets, such as equipment, fixtures, licenses, goodwill, trade secrets, trade names, telephone numbers, and inventory. Asset sales usually don’t include cash and the seller will often stay on the hook for company debt obligations. Accounts receivable and accounts payable may also be included in the sale.
If the business being sold is a sole proprietorship, a partnership, or a limited liability company (LLC), the transaction must be structured as an asset sale. If the business is incorporated (as a regular C-corporation or as a subchapter-S corporation), the buyer and seller can choose whether to structure the deal as an asset sale or a stock sale.
Buyers generally prefer to buy assets because this structure allows more flexibility in acquiring selected assets (and avoiding selected liabilities) while sellers typically prefer a stock sale to reduce taxes and reduce the paperwork of transferring ownership of each asset.
Tax consequences
In an asset sale, the buyer gets a “step-up” in basis from the seller’s original basis. By allocating a higher value for assets that depreciate quickly (like equipment) and by allocating lower values on assets that depreciate slowly (like goodwill), the buyer can reduce corporate taxes in the future and improve the company’s cash flow during the early years of operation.
For sellers, asset sales generate higher taxes, because certain “hard” assets such as land, buildings, equipment, inventory, and promissory notes can be subject to higher ordinary income tax rates. As noted in our last post (Tax Traps for Business Sellers), ordinary income rates depend on the taxpayer’s income, and may exceed 43% for the highest bracket, compared to a 15% capital gains tax.
And if the business is a regular C-corporation, the seller faces double taxation. First, the corporation gets taxed on the sale of assets to the buyer. Then the shareholders of the company get taxed on the income and dividends received from the corporation.