In an Outright Sale you receive cash or some combination of cash, notes and stock for your entire ownership interest. You may remain under contract for some period of time to ease the transition for the buyer but you retain no equity in your specific business. Should the transaction be a merger for stock of the buyer, then you would retain a degree of ownership in the combined entity. A sale is usually structured as a purchase of the stock or the net assets of the company.

Knowledge gives a certain amount of power. A knowledge of details has served in many a crisis. A knowledge of details has often caught an error before it became a catastrophe. Aimee Buchanan

Stock Sale

In a stock sale the corporate entity is sold and the buyer assumes all assets and liabilities, both known and unknown, including contingent liabilities. These would include the costs of environmental cleanup, a lawsuit which has been filed but not decided or a post-closing lawsuit filed for a product or service sold under the original owner. The seller only pays taxes on the capital gains realized on the shares sold. With current long-term federal capital gains rates at 20%, this is very beneficial to the seller.

Asset Sale

In an asset sale the buyer attempts to limit their exposure to potential liability by specifying in the contract which assets are being purchased and which liabilities assumed. An asset sale can also be helpful to a seller by allowing the owner to retain certain assets not essential to operating the business such as real estate or certain accounts receivable. However, the tax treatment is generally less attractive to a seller who owns a "C" corporation since the possibility of double taxation exists.

Assuming the net assets are sold and the principal asset of the "C" corporation is the cash proceeds from the sale, the company is taxed on the gains realized on the sale of assets AND the shareholders are taxed on their capital gains when the corporate entity is liquidated and the cash distributed to the owner(s). Usually in an "S" corporation or an "LLC", some or all of the company's taxation may be avoided and only the owner will pay taxes.

Since the buyer typically prefers an asset sale and the seller a stock sale, these differences and their relative values are usually hammered out in negotiations. We are simply highlighting the differences between a stock and asset sale. A seller needs to consult with a tax advisor to explore and understand their personal circumstances in greater depth.

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