In buying or selling a business, the parties need to choose between a purchase and sale of assets or a purchase and sale of the stock. The buyer of the assets or stock and the seller of the business can have various reasons for preferring one type of sale over the other. The decision whether to structure the transaction as a transfer of assets or stock is often a very important tax issue. In general, the short answer is that a stock deal is better for seller, while the buyer benefits from an asset deal. But, since we are talking about tax law, there are infinite variations and complications. As such, you will want to get professional tax and legal advice before proceeding.
This structure refers to the acquisition of individual assets and liabilities. The seller is required to transfer the assets and the buyer receives a step-up in the tax basis to the fair market value paid for such assets. The benefit of the tax basis step-up is that the buyer will depreciate or amortize the acquired assets each year for income tax purpose. In addition, the buyer benefits from choosing which liabilities to assume and which liabilities to leave behind with the seller. A drawback for a “C” corporation seller in an asset deal is that the seller may experience double taxation as C corporations pay income tax at the entity level on the gain, while the individual shareholders are taxed when they receive the money from the corporation. However, for "S" corporation, this issue is limited to the states which impose an entity level tax on “S” corporations (e.g., California).
· The buyer receives a step-up in basis of assets acquired
· The buyer usually does not have to assume the liabilities of the target company
· “C” corporation targets cause double layer of taxation
· Transferring assets may be more complicated
In a stock deal, the buyer acquires the stock of the target corporation from its shareholders and both sides benefit from the relative simplicity of a stock deal. However, a disadvantage of stock deals for buyers is the inability to step up the tax basis of acquired assets to fair market value. Instead, the buyer receives the target corporation’s tax basis. For “S” corporation targets, this issue can be resolved by a special tax election (Section 338(h)(10) election) at no or minimal marginal tax friction.
· Cash goes directly to the shareholders
· Transferring stock rather than assets is relatively a simpler transaction
· No step-up in the tax basis of assets acquired except for a 338 (h)(10) election
· The lower depreciation expense can result in a higher future tax for the buyer, as compared to an asset deal
· The buyer may end up with higher risk due to contingent, unknown, or undisclosed liabilities
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