Home/How to Prepare a Stock or Asset Purchase Agreement When Buying or Selling a Business in California

How to Prepare a Stock or Asset Purchase Agreement When Buying or Selling a Business in California

How to Prepare a Stock or Asset Purchase Agreement When Buying or Selling a Business in California


There are various ways to structure the sale or acquisition of a business in California. However, the question of whether the transaction should be structured as a stock purchase or as an asset purchase has major effects for both the buyer and the seller of a business and other components of a deal structure are adjusted based on the structure agreed upon by the parties. This article discusses the pros and cons of an asset purchase agreement and a stock purchase agreement.

Asset Purchase Agreement

Under an asset purchase agreement structure, the purchaser may either establish a new entity (e.g., corporation or LLC) or the buyer may use an existing corporation or LLC to consummate the purchase and sale. The assets and liabilities that are specifically stated in the asset purchase agreement will be transferred to the buyer. The other assets and liabilities that are not stipulated in the agreement or that are specifically excluded will remain with the existing business (the seller). In this type of transaction, the seller will also retain his/her ownership of the shares of stock in a corporation, or membership interest in an LLC that is being sold.

From a tax perspective, the existing business will take a gain or a loss based on the difference between the sales prices and the current value of the assets and liabilities. From an accounting point of view, the buyer should record the assets and liabilities at the fair market value assigned to the buyer as part of the transaction. This may result in the increase or reduction of the carrying value and/or total amount of the annual depreciation of the individual assets and liabilities.

Asset purchase transactions generally may be more complex than stock purchase transactions due to the necessity of actually transferring the ownership of the assets and liabilities and any related contracts to the buyer. This is often completed by filing the documents with governmental offices that may require the payment of additional fees. The other issues that should be considered by the parties include the potential transfer of the corporate name, trade names, trademarks, fictitious business names, as well as the rehiring of staff by the acquiring party. When the transaction involves the sale of all, or nearly all, of the assets of the selling entity, the parties should comply with California’s “Bulk Sales” laws. Under these laws, the buyer is mandated to inform all the creditors of the selling business about the planned sale of the business assets.

Stock Purchase Agreement

Under a stock purchase agreement, a transaction usually involves the acquisition of an entire business like a corporation, including all of its outstanding shares of stock. However, if a sole proprietorship, a limited liability company (LLC), or a partnership is involved in the transaction, the appropriate term is “membership interest” rather than “stock purchase.” Under a stock purchase structure, the buyer in effect takes over the seller without interrupting the operation of the acquired business. The seller, meanwhile, relinquishes all his/her continuing interest in, or obligation to, the business assets, liabilities, or operations.

From a tax perspective, the seller takes a gain or loss based on the difference between the selling price and his/her existing basis in the stock. From an accounting point of view, the total assets and liabilities of the business being sold remain as it is and will be depreciated in the same way as before the transaction is consummated.

Asset Purchase Agreement and Stock Purchase Agreement Compared

Generally, a stock purchase deal is more favorable to sellers of a business because they will be completely freed from the business and any future obligations that may arise with respect to it. The seller also pays the taxes based on the purchase price at the lower capital gains rate. On the other hand, the seller may incur a higher tax liability if the buyer is only buying the assets, as opposed to the business itself. This is because the business could pay tax on the income from the asset sale, and a second tax if the proceeds will be distributed to the selling owner. The LLC could also pay a gross revenue tax on the purchase price.

Meanwhile, an asset purchase transaction is usually preferred by buyers because they have the option to choose which assets to buy and which liability, if any, to assume. This is particularly important in cases where the acquired business has many actual or potential liabilities or if it is hard to calculate the amount of the liabilities.


Based on the above discussion, there are various factors that can affect both buyers and sellers very differently in a stock purchase agreement and an asset purchase agreement. It is, therefore, very important for both parties to consult a business or corporate transactional attorney at the very start of the process to fully understand the issues before making their decision.

By | 2017-12-21T11:43:17+00:00 December 21st, 2017|Articles|0 Comments