Whether you’re trying to sell your business or buy a business, you should know whether a stock sale or an asset sale is more beneficial for your situation.
What are the differences, and why do they matter?
At CSI Accounting & Payroll, we’ve worked with small business operations and finances for over 50 years. That means we’ve spoken to thousands of clients about what their retirements would look like, which can include selling their businesses.
Here’s what they want to know about stock sales and asset sales:
- What is the difference between a stock sale and an asset sale?
- What are the differences in tax consequences?
- Is one better than the other for different business sizes and entities?
Differences Between Stock & Asset Sales
Stock sales and asset sales are both different ways to sell a business.
Looking to transfer your business ownership in a different way? Check out these popular methods to transfer your business to a family member.
Stock Sale
A stock sale is when the owner sells off stock shares. Selling all of your stock to someone means the buyer will own all of the business’s assets and liabilities – unless you explicitly exclude them in the purchase agreement.
(Usually, when an owner is looking to sell, they sell off 100 percent of their shares. Otherwise, if they’re only selling some of their shares, they’re really just looking for investors to help them grow the business.)
Asset Sale
An asset sale is the sale of just the good stuff: the equipment, trademarks, and customer list, for example. The seller keeps everything else: the cash that’s in the business, receivables, and liabilities.
Basically, the buyer takes the meat of the business and uses it to form a completely different company. The seller keeps their company minus the assets.
Stock & Asset Sales’ Tax Implications
Now, let’s get into the tax considerations a bit more.
Stock Sale
In a stock sale, the seller may get preferential capital gains treatment.
Meanwhile, buyers have to take the same depreciation methods that were being used by the seller, and the value of the purchased stocks is not deductible.
Asset Sale
With this method, the seller will pay capital gains rates on anything sold that is not already depreciated. The things that are already depreciated will be standardly taxed.
The major benefit to the buyer is that they can choose the depreciation method and deduct the entire purchase price.
Other Considerations
There are two IRS provisions that we get asked about sometimes, although they have their limitations.
First, forming a ROBS (Rollovers as Business Startups) account allows you to do a stock sale or an asset sale using your 401(k) money.
Second, the Section 338 election allows a stock sale to be treated as an asset sale if both parties want to do this.
Best Sale Type for Different Business Sizes & Entities
Now, let’s talk about which types of businesses often use either stock sales or asset sales.
Stock Sale
Stock sales are most common for large businesses. That’s because it can be easier for a large business to absorb into their existing company, which is often what these types of businesses are looking for.
All entities can participate in a stock sale, although since C-Corps tend to be larger businesses, that can mean that C-Corps are slightly more likely to choose a stock sale. Ultimately, entity does not matter too much when deciding between a stock sale and an asset sale.
Asset Sale
Asset sales are most common for small businesses. That’s because most people don't want to absorb liabilities that they aren’t sure of, and there is less risk with an asset sale.
All entities can participate in an asset sale, although since Sole Proprietorships, Partnerships, and S-Corps tend to be smaller businesses, that can mean that they are slightly more likely to choose an asset sale. Again, entity doesn’t matter much in this decision, so C-Corps can participate as well.
Set up Your Business Sale for Success
Regardless of which option you choose, a monthly accountant can help you sell your business in the most advantageous way.
Now that you know the difference between a stock sale and an asset sale, the differences in tax implications, and which is better for different business sizes and entities, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about the other ways that a monthly accountant can improve your business’s future.
