Asset Purchase vs Stock Purchase

The two ways to buy a business - buying what it owns or buying the entity that owns it - and why the choice decides which liabilities come with it, which contracts transfer, and how the price is taxed.

Looking for a lawyer rather than a definition? Skip to the state-by-state list of Mergers & Acquisitions law firms.

What it means

A business changes hands in one of two ways. In an asset purchase the buyer acquires specific things the business owns - equipment, inventory, contracts, intellectual property, goodwill, a lease - and leaves the selling entity in the seller's hands, along with any liabilities the buyer did not expressly assume. In a stock purchase (or, for an LLC, a membership interest purchase) the buyer acquires the entity itself, and everything the entity owns and owes comes with it, known and unknown. Buyers therefore generally prefer assets and sellers generally prefer stock, and much of the negotiation is about which side's preference wins and at what price.

The differences are practical. In an asset deal each contract, license and permit must be transferred, and many cannot be assigned without the other party's consent; employees are terminated and rehired; and the buyer usually gets a stepped-up tax basis in what it bought while the seller may face two levels of tax if it is a corporation. In a stock deal the entity's contracts, licenses and employment relationships continue undisturbed, and the seller typically receives capital-gain treatment, but the buyer inherits every liability, which is why stock deals carry heavier representations, warranties, indemnities and escrows.

An asset deal does not always leave liabilities behind. Under successor liability doctrines a buyer of assets can be held responsible for the seller's obligations where it expressly or impliedly assumed them, where the transaction was in substance a merger, where the buyer is a mere continuation of the seller, or where the deal was structured to escape creditors; some states add product-line and environmental variants. Unpaid state taxes commonly follow the assets unless a tax clearance is obtained before closing.

Where this comes from

When people hire a lawyer for this

The structure question should be put to a lawyer and a tax adviser together before a letter of intent is signed, because it is decided there and is expensive to reopen. A buyer of assets should ask specifically which contracts need consent to transfer and which state liabilities follow the assets; a seller of stock should expect the buyer to demand indemnities and a holdback and should understand exactly what those cover and for how long.

Worried about the cost? A lawyer can be hired for one part of a case only (limited-scope representation), may be paid from what a claim recovers (contingency fee), or may be free through a pro bono program or legal aid; a court can also waive its own filing fees.

Find Mergers & Acquisitions law firms in your state

Choose your state to see Mergers & Acquisitions law firms in the city where we list the most; your city may be under “other cities”, A to Z. A state marked “Business Law” has no Mergers & Acquisitions listing yet and opens the broader page.

• Alabama (Birmingham)
  +1 other city

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• Alaska (Anchorage, Business Law)
• Arizona (Chandler)
  +6 other cities

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  • and 6 more with fewer listed firms
• Colorado (Aurora)
  +2 other cities

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• Delaware (Wilmington, Business Law)
• District of Columbia (Washington)
• Florida (Hialeah)
  +5 other cities

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• Louisiana (Baton Rouge)
  +2 other cities

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  • Shreveport
• Maine (Portland, Business Law)
• Maryland (Baltimore)
• Massachusetts (Boston)
• Michigan (Detroit)
• Minnesota (Minneapolis)
  +1 other city

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• Nevada (Henderson)
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• New Jersey (Jersey City)
  +1 other city

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• New Mexico (Albuquerque)
• New York (New York City)
  +2 other cities

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• North Carolina (Charlotte)
  +5 other cities

  • Durham
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• North Dakota (Fargo, Business Law)
• Ohio (Cincinnati)
  +3 other cities

  • Cleveland
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• Oklahoma (Oklahoma City)
  +1 other city

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• Oregon (Portland)
• Pennsylvania (Philadelphia)
  +1 other city

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• Rhode Island (Providence)
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• Tennessee (Memphis)
  +1 other city

  • Nashville
• Texas (Houston)
  +12 other cities

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• Utah (Salt Lake City)
• Vermont (Burlington)
• Virginia (Chesapeake)
  +3 other cities

  • Norfolk
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• Washington (Seattle)
  +1 other city

  • Tacoma
• West Virginia (Charleston)
• Wisconsin (Madison)
  +1 other city

  • Milwaukee
• Wyoming (Cheyenne, Business Law)

Related terms

Other entries in the same area of law, each written from the same primary sources.

• AsylumProtection for a person in the United States who fears persecution in their home country on account of race, religion, nationality, political opinion or membership in a particular social group, and how it differs from withholding of removal.
• Breach of ContractA failure to do what a binding agreement required - and the question a court actually asks is not whether someone broke a promise but what the loss was and whether it could have been avoided.
• Buy-Sell AgreementThe contract between co-owners of a business that says what happens to an owner's share when they die, leave, divorce or go bankrupt - who must or may buy it, at what price, and with what money.
• DBA (Fictitious Business Name)A registered trade name under which a person or company does business - which tells the public who is behind the name and does nothing else.
• Fiduciary Duties and the Business Judgment RuleThe duties of care and loyalty that directors, officers, managers and controlling owners owe the business, the rule that protects honest decisions that turned out badly, and the derivative suit that enforces them.
• Franchise Disclosure Document (FDD)The document a franchisor must give a prospective franchisee before any contract is signed or money changes hands - what the federal rule requires it to contain, what it does not promise, and the state laws that add registration and relationship rights.
• General and Limited PartnershipsA general partnership can be formed by conduct with no paperwork and makes every partner personally liable; a limited partnership requires a filing and shields the partners who do not manage. What each is, and the LLP and LLLP variants.
• Green Card (Lawful Permanent Residence)How a non-citizen becomes a lawful permanent resident of the United States: the family, employment and other routes, the petition and the application, and why the order of the steps matters.
• H-1B Specialty Occupation VisaThe employer-sponsored temporary work visa for jobs that require a specialized degree: the labor condition application, the annual cap and lottery, the employer's wage duties, and what happens if the job ends.
• Indemnification and Hold Harmless ClausesThe contract provision under which one party agrees to cover another's losses and defend it against claims - what it usually reaches, the state laws that void some of it, and why insurance is the other half of the promise.
• Independent Contractor vs EmployeeTwo legal categories of worker with very different consequences for taxes, overtime and liability - and a label in a contract does not settle which one applies.
• Insurer's Duty to DefendThe promise in a liability insurance policy to pay for the policyholder's lawyer when they are sued, why it is broader than the duty to pay a judgment, and what happens under a reservation of rights.
• K-1 Fiance(e) VisaHow a U.S. citizen brings a foreign fiance(e) to the United States to marry, the in-person meeting and disclosure rules, what must happen after arrival, and the alternative of marrying abroad first.
• Letter of Intent (LOI) and Term SheetThe preliminary document that sets out the main terms of a deal before the contract is drafted - which parts of it are usually binding, which are not, and how a "non-binding" letter still creates obligations.
• Limited Liability Company (LLC)A business form that shields its owners from most business debts while staying simpler to run than a corporation.
• Naturalization (Becoming a U.S. Citizen)How a lawful permanent resident becomes a U.S. citizen: the residence, presence, character, English and civics requirements, the interview, and what happens after a denial.
• Non-Compete AgreementA promise not to work for a competitor or start a competing business for a period after a relationship ends - enforceable in some states, sharply limited in others, and void in a few.
• Non-Disclosure Agreement (NDA)A contract restricting what one or both sides may do with information the other shares - and, unlike trade secret law, it binds only the person who signed it.
• Operating AgreementThe private contract among an LLC's owners that decides who controls the company, how money is split, and what happens when someone leaves - or the state's default rules decide it for them.
• Personal GuaranteeA promise by an individual - usually a business owner - to pay a company's debt personally if the company does not, which puts the owner's own assets behind the loan or lease regardless of the entity's liability shield.
• Piercing the Corporate VeilThe exception under which a court holds an owner personally liable for a company's debts, despite the limited liability the company normally provides.
• Registered AgentThe person or company a business entity must designate to receive lawsuits and official notices on its behalf - and the address at which a default judgment can quietly begin.
• Removal (Deportation) DefenseWhat happens when the government seeks to remove a non-citizen from the United States, the hearing they are entitled to, and the forms of relief an immigration judge can grant.
• S Corporation ElectionA tax election, not a kind of company - what electing S status does to how a corporation or LLC is taxed, who is eligible to make it, and how it is lost.
• Starting a Nonprofit (501(c)(3) Status)How a nonprofit is formed under state law, how it gets federal tax exemption as a charity, and the rules it must follow to keep it.
• Tax Debt Relief (IRS Collection, Installment Agreements and Offers in Compromise)What the IRS can do to collect a tax debt, the rights a taxpayer has at each step, and the programs that let a debt be paid over time, settled for less, or put on hold.
• U Visa for Crime VictimsImmigration status for non-citizen victims of certain crimes who help the police or prosecutors, how the law enforcement certification works, and the related T visa and VAWA protections.
• UCC Financing Statement (UCC-1)The public notice a lender files to stake its claim on a borrower's equipment, inventory, receivables or other business property - the filing that decides who gets paid first when a business fails.

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