Entity and Asset Purchase Agreements – What’s the Difference?

  • March 14, 2019
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Entity and Asset Purchase Agreements – What’s the Difference?

An acquisition is just another way of referring to the act of one business purchasing another. There are, however, two different types of acquisitions – Asset Purchase Agreements and Entity Purchase Agreements. The best approach for you will depend on your specific situation, but we hope that our breakdown below will help point you in the right direction.

Asset Purchase Agreement

An Asset Purchase Agreement is reached when one business agrees to purchase the assets of another. These assets include everything from physical property like inventory and equipment to intangible property such as trade secrets and copyrights. The business selling its assets retains its corporate or limited liability company ownership (also known as the company’s “shell”), although this is a practical matter as there is no real operation left to continue. Asset Purchases are especially useful when acquiring a sole proprietorship or general partnership. That’s because, unlike LLCs and corporations, sole proprietorships and partnerships have no shell or ownership structure left over after the assets have been purchased.

Entity Purchase Agreements

Entity Purchase Agreements are accomplished through the purchasing of the majority of another business’s stock. This is why they are also known as Stock Purchase Agreements. Once the transaction is complete, the former owners step aside so that the new management can take over and maintain the business’s status quo. But the buyer should beware – not only are you acquiring the seller’s entity, you’re acquiring the entity’s debt and other responsibilities as well!

Which is Right for Me?

While you should certainly consider the unique details of your particular transaction, the two main factors to account for when deciding between an Asset Purchase Agreement versus an Entity Purchase Agreement are taxes and liability.

As far as taxes go, Asset Purchases tend to favor the buyer because the buyer has the ability to depreciate the assets sooner than not. What’s more, the seller risks double taxation with Asset Purchases – and that’s something that almost all of us want to avoid at all costs! When it comes to Entity Purchases, on the other hand, the Seller will typically have the advantage. This is because the seller only pays taxes at the low long-term capital gain rate.

Now let’s take a look at how debts and liabilities impact the parties during an acquisition. With an Asset Purchase, the Buyer enjoys protection from the Seller’s previous debts. The exception with that protection comes when the Buyer agrees to take on the Seller’s debts, usually in exchange for a lower price. Entity Purchases are a little bit trickier. In that situation, the Buyer assumes all of the Seller’s liabilities.

Need Help?

Buying a business is no simple matter, and there’s no shame in asking for some help getting through the process in the way that’s most advantageous to you and your goals. Small business attorneys can help guide you through the legal jargon and keep an eye out for risks that you might not even be aware of.

Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website, www.FLPatelLaw.com, or calling 727-279-5037.

Tyler Thompson is a second generation St. Petersburgian with a passion for reading and writing. In 2018 he finally made his way to FL Patel Law PLLC where he has found a home for himself as Project Manager. He is an unapologetic dog person who enjoys spending what free time he has with his friends and family.

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