Asset Sale vs. Stock Sale

Asset Sale vs. Stock Sale

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As we know from our previous article, What is an S-Corporation, s-corps have major tax savings for business owners, most notably avoiding double-taxation and saving money on social security and medicare taxes by using a pass-through income structure. Making the s-corp election is an excellent strategy for business owners, but what about when you want to sell or purchase an existing s-corp or other business entity? Things can get a little hairy when it comes to business acquisitions.

For tax purposes, there are really only two ways to structure the sale, assuming it’s a complete transfer of ownership, rather than slowly buying out the owner over time. These two deal structures are an asset sale vs. stock sale, and we’ll get into the details of each one below. 

The decision between these two structures will be the first thing on the agenda after you’ve decided to purchase or sell a business, and it can get a bit complicated since each structure typically benefits one side of the transaction more. Check out our article for buying an S corporation to get a detailed look at the buyer’s perspective or selling an S corporation for a roles-reversed explanation. 

Just keep in mind, every business sale is unique, and you’ll definitely want to give our s-corp accountants a call for tailored help with your particular small business acquisition or sale.

What Does an Asset Sale Mean?

In the case of an asset sale, the buyer purchases individual assets from the s-corp, and the seller holds on to their ownership of the legal entity. The purchased assets typically don’t include cash, and the seller usually also retains long-term debt obligations. 

This type of sale structure is sometimes referred to as a ‘cash-free, debt-free’ sale. Purchased assets, for example, may include trade secrets, inventory, equipment, licenses, phone numbers, and goodwill. Additionally, normalized net working capital is usually included in the sale and may include accounts receivable, accounts payable, accrued expenses, prepaid expenses, and inventory.

What is Allocation in an Asset Sale?

As you learned above, in an asset sale, all of the assets are individually evaluated, and their negotiated amounts make up the purchase price. The buyer and seller allocate the assets to different classes or “buckets” that are laid out by the IRS, and this is attached to their respective tax returns for the year of the sale/purchase. The allocation must be consistent between the buyer and seller. 

When negotiating the asset allocation, each side will typically have opposing preferences on which classes to allocate higher purchase price amounts to because different classes will favor the buyer vs. the seller for taxes, and vice versa. 

The following table provides a general overview of the different “classes” that the IRS provides for allocation. Be sure to check out our allocation articles on the buyer’s perspective or the seller’s perspective to see the implications and preferred allocation for your respective side of the transaction.

IRS ClassAssets
Class ICash and most general deposit accounts
Class IISecurities
Class IIIAccounts Receivable
Class IVInventory
Class VAll other tangible assets that don’t fall under one of the above classes i.e. personal property and real estate
Class VINon-compete covenants and all other intangible property that does not fall under Class VII
Class VIIGoodwill and going concern value
Business Sale Asset Allocation Classes

As a handy tool, you can also download our detailed PDF allocation tables below to see each side’s general preferences and more details about the assets that fall into each “bucket.”

The Buyer’s Perspective on Asset Allocation – PDF

The Seller’s Perspective on Asset Allocation – PDF

What Does a Stock Sale Mean?

Unlike an asset sale, in a stock sale, the buyer obtains ownership in the legal entity, such as an s-corp, by directly purchasing shares of the business. The assets that are included in the transaction are typically similar to those in an asset sale. However, in a stock sale, individual assets do not require separate deep analysis since the assets’ titles remain within the corporation. Any assets that the buyer doesn’t want are typically paid off or distributed before the sale closes.

Are All Business Entities Able to Do a Stock Sale (Instead of an Asset Sale)?

In the case of an s-corp or c-corp sale, the asset vs. stock sale choice applies, but the questions and rules about sale structure change for different business entities, such as sole-proprietorships, LLC’s or partnerships.

Additionally, if the sale is concerning a subsidiary such as a QSub, then the sale structure would automatically be treated as an asset sale since an s-corp subsidiary is considered a division of the parent s-corp. Our focus is on s-corps and the tax savings that come with making the election, but we’re always happy to help any type of small businesses navigate acquisitions, bookkeeping, or accounting. 

Is an Asset or Stock Sale Easier Overall?

If we’re talking in black and white, a stock sale may be considered the “simpler” process because it doesn’t require assets to be individually stated along with their associated gain/loss. In an asset sale, each must be calculated and allocated. That being said, usually an asset sale really isn’t too much more difficult for small businesses. 

If the s-corp or other business entity has a ton of big assets or a large amount of assets that run into legal ownership issues, then maybe an asset sale would be more trouble than it’s worth, but otherwise an asset sale is almost always the way to go as a buyer. However, sellers will usually favor a stock sale because it offers advantages for them.

Key Takeaways

  • The buyer and seller will usually have opposing preferences over desiring a stock vs. asset sale.
  • In an asset sale, the buyer only purchases the assets, and the seller maintains ownership of the legal entity .
  • In a stock sale, the buyer obtains ownership in the legal entity itself and “steps into the shoes” of the previous owner.
  • An asset sale requires evaluation of individual assets and the assets are allocated to different “classes” that have different tax implications for the seller vs. the buyer. 
  • If the business is a sole-proprietorship, LLC or partnership, the questions are different regarding sale structure.

Make sure to get in touch, and we can give you the guidance you need for your small business sale, acquisition, and all things s-corp accounting.