If you are a business owner interested in purchasing or selling a company, it is essential to understand the different types of transactions available. Two of the most commonly used types are asset purchase and share or membership purchase. While they may seem similar, there are significant differences in how they work and the outcomes they produce. This post will explain the differences between these two transaction types, helping you make an informed choice that best suits your business’s unique needs.
An asset purchase is a transaction type that involves the purchase of specific assets that make up a business. These assets can include equipment, real estate, inventory, trademarks and other intellectual property owned by the seller. In an asset purchase, the buyer typically forms a new company or purchases an existing company and continues to operate it. However, they only own the assets that were purchased, and any liabilities incurred by the seller before the transaction will remain with the seller.
One advantage of asset purchase is that the buyer can select which assets they want to purchase, and it helps to reduce the risk associated with buying a complete business. The downside is that the seller can still be liable for unknown or contingent liabilities, and they will have to pay capital gains tax on the sale of the assets.
Share or Membership Purchase
A share or membership purchase is a transaction that involves the purchase of all outstanding shares or membership interests of a business. In this type of transaction, the buyer purchases the entire legal entity, which includes all assets and liabilities. The buyer also acquired the company’s tax history and any legal disputes. Unlike an asset purchase, there is no selection of assets to purchase in a share or membership purchase. Instead, the buyer takes ownership of everything, as a whole entity.
One significant advantage of a share or membership purchase is that the buyer receives all the assets and liabilities of the business in one complete package. The seller is also not responsible for any unknown or contingent liabilities that arise from the business after the transaction. However, the buyer assumes the tax history of the business, which can sometimes be a disadvantage.
Another difference between these two transaction types is the tax implications involved. In an asset purchase, the buyer can allocate the purchase price to the specific purchased assets. They can, therefore, depreciate the assets over the useful life of the purchase price. The buyer will also have to pay sales tax on purchasing equipment or other assets. On the other hand, share or membership purchases do not have these benefits.
In summary, it is essential to understand the differences between an asset purchase and a share or membership purchase. Both transaction types have unique advantages and disadvantages that should be taken into consideration when evaluating which type of transaction to use. Business owners should seek the services of a qualified business attorney and accountant to help them make the best decision for their business. We hope this blog post provides you with valuable information when making your business transaction decisions. Remember, any decision you make must align with your business’s unique goals, objectives, and resources.
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