Michigan Stock Purchase Transactions and Asset Purchase Transactions
When a business acquires another business, it can generally be done in one of two ways: a stock purchase or an asset purchase. A stock purchase is just that, a purchase of the selling company's shares of stock (assuming it's a corporation). Along with ownership of the company's stock comes ownership of its assets and its liabilities. In an asset purchase, the seller keeps ownership of the shares of stock in the business and takes ownership only of the specific assets and liabilities included in the deal. All the other assets and liabilities stay with the existing business and, therefore, with the seller.
Sellers generally prefer to structure sale/purchase transactions as stock purchases because it allows them to completely withdraw from the business after they sell it. When they sell their stock in their business, they are usually totally free from any future responsibilities or obligations relative to the business. Also, a seller's tax on a stock purchase transaction is usually computed at the lower capital gains rate. In an asset purchase transaction that involves a corporation, the seller could face double taxation. This is because the corporation will be taxed at the corporate level on the gain from the asset sale and the shareholder(s) will be taxed if and when the proceeds are distributed.
On the other hand, a buyer will generally prefer an sale/purchase transaction to be structured as an asset purchase. This sort of structure allows the buyer to know specifically which assets and liabilities are being acquired and assumed. This is important to the buyer if the company has a large number of either potential or actual liabilities. It is especially important if it is difficult to quantify the exact amount of the liabilities being acquired. A buyer may also benefit from structuring an acquisition as an asset purchase if the value of a purchased asset has increased. A buyer can write up the tax basis of a purchased asset to the amount of the fair market value paid for that asset. This will allow the buyer to claim increased tax depreciation, which will lower its taxable income, with resulting lower taxes.
It is imperative that each party to a Michigan business sale/purchase transaction retain an experienced Michigan business lawyer to assist and advise them through the process. This will help to ensure that the transaction is structured in the best possible way to achieve all of the intended and desired business and tax benefits.
