Before you can delve too deeply into a company acquisition, you need to determine if the transaction is an Asset Purchase or a Company Purchase. We’re going to talk about the differences, similarities, pros, and cons of each of these.
An Asset Purchase occurs when one party buys the assets, both tangible and intangible, of a company. This includes the inventory, customer lists, goodwill, capital equipment, contracts, accounts receivable, or anything else the company owns that the purchasing party wants. The purchaser can buy all, or only a few of these items.
A Company Purchase occurs when one party buys the ownership from another party, or parties. Unlike the Asset Purchase, there is only one type of asset transferring hands, and that is the stocks in a corporation, or membership interest in an LLC.
In an Asset Purchase, the transaction is between the company and the purchasing company. The purchasing company does not need to be a separately formed legal entity, but for liability and tax reasons, it should. In this transaction, money passes from the purchasing company to the selling company in exchange for the assets. The selling company then distributes the money to the owners usually through a dissolution.
In a Company Purchase, the purchasing party, or parties, gives money to the company owner(s) in exchange for the ownership interest. The company continues to operate without the need for a new EIN or separate legal filings.
Tax and Liability Consequences
Purchasers generally prefer Asset Purchases because it lessens the liability and can generally lead to better tax arrangements, if negotiated properly. The reason these lessen the liability is because the liability is that of the company. When the company continues, the liability goes with the company. Only a few types of liability go with the assets. These are tax liabilities, liens on the assets, and sometimes employment liabilities. Contractual liability, one of the largest areas for companies, does not go with the assets.
A Company Purchase is far easier because the company continues how it already had been. There’s no need for new legal documents to be prepared beyond the company purchase documents, but it is recommended to review all contracts, licenses, employment contracts, and anything else that is legal in your company when you take over an existing business. When your acquisition is an Asset Purchase, you must set up a new legal entity, create new employment accounts and contracts, get all of the proper tax accounts and licenses, and everything else necessary to start a business from scratch.
Depending on your circumstances, either of these options may be the best choice for you. You should carefully consider your situation and what makes the most sense for you. Beyond making this decision, you should also conduct due diligence, whether you’re the buyer or the seller, because you want to know as much as you can about the transaction that is about to occur.
If you’re planning on selling your company, you should maximize the value of your company ahead of time to get the best value for your effort.
If you have any questions about the differences between an Asset Purchase and a Company Purchase, or you would like our help creating or reviewing one of these for you, feel free to contact us at email@example.com or by calling 919-912-9640.