OnwardLearn · Selling · Step 8. Agree on the terms
Selling the assets or the company, and why it changes your taxes
The short version
- A sale can be structured two ways: the buyer buys the company's assets, or buys the company itself.
- Most small business sales are asset sales. Buyers usually prefer them.
- The structure changes what you pay in tax, sometimes by a lot.
- In an asset sale, how the price is split across the assets also changes your tax. Buyer and seller must agree on it.
- Decide the structure with your accountant and your M&A attorney before you sign a [letter of intent](/learn/reference#letter-of-intent "The offer document. It sets out the price, the structure and the main terms, and starts diligence.").
Two ways to sell
An asset sale. The buyer forms their own company and buys the business's assets: equipment, inventory, customer relationships, the name and goodwill. Your company is left with its cash, its debts and anything not sold, and you close it afterward. Lesson 10.4 covers closing out the old business.
A sale of the company. The buyer buys your ownership: the shares of a corporation or the membership interests of an LLC. The company continues as before, with its history, contracts and liabilities, under a new owner.
Why buyers usually prefer asset sales
- They avoid past liabilities. Old claims, debts and problems stay with your company.
- They get a tax benefit. They can write off the price paid for assets over time.
Why sellers often prefer selling the company
- Tax. More of the gain is usually taxed at lower capital gains rates.
- Simplicity. Contracts and licenses often stay with the company, though some still need consent. Lesson 5.6 covers this.
- A cleaner exit. Liabilities go with the company, subject to the promises you make in the purchase agreement.
The tax difference
Several things drive the difference:
- The type of company you have. A C corporation selling its assets can be taxed twice: once at the company level and again when the money is paid to you. S corporations and LLCs are usually taxed once. This is one of the biggest factors.
- How the price is split. In an asset sale, the price is divided across classes of assets, and both sides report the split to the IRS on Form 8594. Some classes are taxed at capital gains rates. Others, such as equipment you have already depreciated, can be taxed as ordinary income.
- Your personal tax situation.
Some structures allow a sale of the company to be treated as an asset sale for tax purposes. Your accountant can tell you whether any apply.
Negotiate structure early
Structure affects the value of every offer. A higher price as an asset sale can leave you with less than a lower price as a sale of the company, or the reverse. Settle the structure, and ideally the approach to splitting the price, in the letter of intent.
Take this to your own people
The questions for this topic, for your attorney, your accountant or your lender.
- For your accountant: "What would I keep from an asset sale compared with a sale of the company, at the same price?" Listen for: both versions in dollars, after tax.
- For your accountant: "How should the price be split across the assets, and what is it worth to me to negotiate that split?" Listen for: which classes are taxed how, and where there is room to negotiate.
- For your M&A attorney: "Which liabilities stay with me in each structure?" Listen for: a clear answer for both, including what the purchase agreement will add.
This names the question. Your CPA, your M&A attorney and your lender answer it for your situation.
When you’re ready
How a sale actually happens, in plain language — before you decide anything. Make a free account — nothing is shared