When preparing to ‘sell my business’, understanding the distinction between an asset sale and a share sale forms the basis of a strategic approach to transferring ownership. These two sale types have unique tax implications and legal considerations that directly affect both sellers and buyers.

 

Understanding the Difference Between the Two Sale Types

A share sale involves the purchase of a company’s shares, meaning the buyer takes over the ownership of the entity with all its assets and liabilities. This transaction is usually simple from a legal standpoint since the business remains the same entity, only with different owners.

Conversely, an asset sale means the buyer acquires individual assets of the company, such as equipment, inventory, and intellectual property. Here, the buyer can be selective about the assets and liabilities they take on, which often requires detailed transfer agreements.

 

Tax Implications and Legal Considerations for Each

In a share sale, sellers may benefit from capital gains tax exemptions or lower rates, significantly impacting after-tax proceeds from the sale. Buyers, though, may inherit potential risks as they assume all liabilities, including those that are not apparent at the sale time.

With an asset sale, buyers typically favor this approach due to potential step-up in basis for depreciation and amortization purposes. Sellers, however, might face a double tax hit: firstly, the corporation pays tax on the sale of assets, and secondly, shareholders are taxed on the withdrawal of the proceeds from the company.

Legal considerations also vary between the two. Asset sales may require third-party consents and can be more complex due to the transfer of specific assets and renegotiating contracts. In contrast, share sales tend to be more straightforward legally but require thorough due diligence to uncover any hidden liabilities.

By examining the individual needs and consequences for your business, a decision can be made that aligns with financial objectives and risk tolerance. A comprehensive analysis of each approach in consultation with financial and legal advisors ensures a tailored strategy for a successful business sale.