In most cases, an asset purchase makes the most sense for buyers because (1) the buyer can avoid assuming unwanted (and unknown) liabilities, and (2) the buyer generally gets the ability to deduct the purchase price for tax purposes (though this deduction is generally spread out over a period of several years after the closing).

On the flip side, sellers usually prefer equity purchases (e.g., stock, LLC membership interest, etc.) because (1) the buyer assumes all known and unknown liabilities, giving the seller more of a “clean break,” and (2) the seller often gets the benefit of ensuring that the entire taxable gain on the sale is taxed at more favorable capital gains rates, rather than the much higher ordinary income tax rates.

While these general rules often hold true, there are other considerations and unique factual situations that might warrant a different result in a particular case. Plus, there are hybrid transaction structures available such as forward mergers, reverse mergers, contributions, and certain tax elections that might make sense in a particular case.

Deciding on the right transaction structure is a critical consideration for both buyers and sellers at the outset of any potential transaction. We can help you identify the optimal transaction structure and then execute on the deal.

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