Guide to Obtaining American Businesses
Acquiring a U.S. Business: Understanding the Differences Between Stock Purchase, Asset Purchase, and Statutory Merger
In the realm of mergers and acquisitions (M&A), three primary methods are commonly used to acquire a U.S. business: stock purchase, asset purchase, and statutory merger. Each method has its unique features, tax implications, and associated risks.
- Stock Purchase
In a stock purchase, the buyer acquires shares of the target company from its shareholders, gaining control over the entire company, including all assets and liabilities. The target company continues to exist as a legal entity unchanged except for ownership. The buyer assumes all known and unknown liabilities, which increases risk. For buyers, the purchase price is generally not tax-deductible, and they do not get a "step-up" in the tax basis of the underlying assets unless a special 338(h)(10) election is made, limiting depreciation deductions. Sellers often prefer stock sales because the proceeds typically qualify for favorable capital gains treatment, potentially taxed at long-term capital gains rates with no double taxation (for S corporations or individuals).
- Asset Purchase
In an asset purchase, the buyer purchases specific assets (e.g., equipment, inventory, contracts) and can selectively assume liabilities. This allows the buyer to avoid unwanted liabilities. The target company remains legally unchanged, but sells assets, which often requires separate consent or assignment for contracts and licenses. From a tax perspective, buyers benefit from a "step-up" in the tax basis of acquired assets to the purchase price, enabling increased depreciation and amortization deductions and reducing future taxes. Sellers may face double taxation if the seller is a C corporation, since the corporation pays tax on the gain at the corporate level, and shareholders pay tax again on distributions. Gains realized from asset sales may be subject to ordinary income tax rates depending on the asset type.
- Statutory Merger
A statutory merger involves two companies combining, with one surviving and the other disappearing. One company merges into another, and the target company's assets, liabilities, contracts, and obligations automatically transfer to the surviving company by operation of law. The target company ceases to exist as a separate legal entity. Tax consequences depend on whether the merger qualifies as a "tax-free reorganization" under IRS rules. If it does, the transaction can be tax-deferred for both parties, meaning no immediate gain or loss is recognized. If it is a taxable merger, the tax consequences could resemble those of an asset sale or stock purchase depending on the structure. Mergers generally consolidate operations fully, unlike asset purchases, and transfer all liabilities and assets together.
In summary, buyers often prefer asset purchases for tax benefits and liability protection, while sellers often prefer stock sales for favorable capital gains treatment. Statutory mergers can provide a tax-efficient way to combine companies fully if structured to qualify as tax-free reorganizations. Each transaction type entails distinct legal, tax, and risk considerations that must be carefully negotiated.
[1][3][4][5] - Section 368 does not apply to entities taxed as partnerships, such as most LLCs and limited partnerships. - The buyer can choose which assets to purchase and leave the rest with the previous owner. - In a stock purchase, an existing company is acquired via purchasing its stock or shares. - A simple merger is when the acquired company merges with the acquiring company, while a triangular merger is when the acquiring company forms a subsidiary and the acquired company is merged with it. - If you're a business owner looking to raise money, you might encounter legal paperwork like an investment agreement as part of the fundraising transaction.
- In a stock purchasing scenario, the buyer acquires shares of the target company, assuming control over the entire company, making it crucial for buyers to consider the potential risks associated with the unknown liabilities they may inherit.
- Conversely, choosing an asset purchasing method offers buyers the ability to selectively assume liabilities, providing a level of protection against unwanted obligations, while still benefiting from tax incentives such as a "step-up" in the tax basis of the acquired assets for increased depreciation and amortization deductions.
