# Asset sale or share sale: what is the difference? An asset sale transfers chosen assets and liabilities out of a company; a share sale transfers the company itself, with everything in it. How they compare. --- In an asset sale the buyer purchases chosen assets, and takes on chosen liabilities, from the company that owns the business, and that company stays with its owners; in a share sale the buyer purchases the company itself from its shareholders, with every asset, contract, employee and liability it holds. The business that changes hands can be exactly the same in both cases; what differs is who sells, what follows the business without being listed, and how the price is taxed on each side. This article sets the two structures side by side on fixed criteria, then works through the tax logic using the United States as the named example, with a price allocation and the price adjustment that makes a seller indifferent between the two. Employee transfer is illustrated with the United Kingdom's rules. Law and tax differ by country and, in the United States, by state: this is general information, not tax or legal advice, and the figures in the worked example are illustrative.
7 classesof assets, from cash to goodwill, across which a United States purchase price is allocated on Form 8594
80%of a target's stock, by vote and value, bought within 12 months, is the purchase that opens a section 338 election
9th monthafter the acquisition date: a section 338 election is due by the 15th day of that month

Internal Revenue Service, instructions for Form 8594 and for Form 8023.

## What is transferred in an asset sale, and what in a share sale? An asset sale transfers the specific assets and liabilities named in the purchase agreement, while a share sale transfers ownership of the company and therefore everything the company owns and owes, named or not. In an asset sale the seller is the company. The agreement carries schedules: the equipment, the stock in trade, the customer contracts, the trade name, the software, the lease, the receivables if they are included, and on the other side the liabilities the buyer agrees to assume, such as open customer orders or accrued holiday pay. Anything not listed stays behind in the selling company. After closing, that company still exists, still belongs to its shareholders, and now holds the sale proceeds together with whatever was excluded: often the cash, sometimes the receivables, and the liabilities nobody assumed. In a share sale the sellers are the shareholders. The agreement transfers their shares, and nothing inside the company moves at all. The company keeps its registration number, its bank accounts, its contracts, its employees, its tax history and its licences. It also keeps its problems, such as a tax assessment for a past year or a claim not yet made. The buyer protects itself with due diligence and with warranties and indemnities from the sellers, because the liabilities cannot be left behind by drafting. In the United States a share sale is usually called a stock sale, and for a limited liability company or a partnership the equivalent is a sale of membership or partnership interests. ## How do the two structures compare, criterion by criterion? An asset sale lets the parties choose what moves but makes every item move individually, while a share sale moves everything at once and leaves no choice about what comes with it. | Criterion | Asset sale | Share sale | | --- | --- | --- | | What is sold, and by whom | Listed assets and assumed liabilities, sold by the company | The shares, sold by the shareholders | | Liabilities | Only those the buyer agrees to assume, subject to the limits covered below | All of them stay in the company the buyer now owns, known or unknown | | Contracts and consents | Each contract is assigned or replaced; many need the other party's consent | Contracts stay in place; consent needed only where a change-of-control clause says so | | Employees | Move to a new employer, by rehire or by a statutory transfer rule, depending on the country | Employer unchanged; contracts continue as they are | | Licences and permits | Often not transferable; the buyer applies for its own or seeks approval | Stay with the company, though some regulators must approve a change of owner | | Complexity of transfer | Many separate transfers: titles, registrations, leases, intellectual property, bank and payroll setup | One transfer instrument, but heavier diligence and longer warranties | | Tax, in general terms | Buyer usually takes the assets at the price paid; seller taxed asset by asset | Buyer takes the shares at the price paid, the company's own asset values unchanged; seller taxed on the shares | ## Why do buyers tend to prefer assets and sellers shares? Buyers tend to prefer an asset purchase because it limits the liabilities they inherit and, in many tax systems, lets them deduct the price over time; sellers tend to prefer a share sale because it gives a clean exit and is often taxed more lightly in their hands. The buyer's reasoning has two parts. The first is risk: a buyer of assets chooses its liabilities, while a buyer of shares takes the company's whole history. The second is tax: where the buyer takes the assets at the price it paid, more of that price can come back through depreciation and amortization deductions than when it buys shares in a company whose assets keep their old tax values. The seller's reasoning mirrors it. A share sale ends the shareholders' involvement in one step. After an asset sale the owners still hold a company that must settle the liabilities left behind, pay its own tax on the sale, and then distribute what remains or be wound up. On the tax side, a sale of shares is usually one gain on one asset, while a sale of assets is a set of separate gains of different kinds, and when the selling company is taxed as a separate entity, moving the proceeds on to its shareholders can attract tax a second time. ## How does United States tax law treat the two structures? United States federal tax law treats the sale of a business by assets as a separate sale of each asset, and gives the buyer a cost basis in what it bought, while a sale of corporate stock is generally one sale of one capital asset. The Internal Revenue Service's guidance on the sale of a business puts the first point plainly: each asset is treated as being sold separately for determining the treatment of gain or loss. According to the same guidance, the sale of capital assets results in capital gain or loss, the sale of inventory results in ordinary income or loss, and real or depreciable property used in the business and held for more than one year produces what the tax code calls a section 1231 gain or loss. A seller of assets therefore has a mix of results, and the mix depends on how the price is divided among the assets. A shareholder who sells stock, by contrast, usually realizes capital gain or loss on the shares, as the agency's guidance on investment income describes, and an interest in a partnership is treated as a capital asset when sold, except for the part of the gain tied to unrealized receivables or inventory, which is ordinary. For the buyer, the governing idea is basis: the Internal Revenue Service defines basis as the amount of your investment in property for tax purposes, and states that the basis of property you buy is usually its cost. Basis is what depreciation and amortization are figured on. A buyer of assets gets a basis in each asset equal to the part of the price allocated to it. When that is higher than the basis the seller had, practitioners call the result a stepped-up basis: the same equipment, customer list and goodwill now carry tax values that reflect the price just paid, and the buyer recovers them through deductions over the periods the tax code sets for each kind of asset. A buyer of stock gets a cost basis too, but in the stock. The basis of stock you buy is generally the purchase price plus the costs of purchase, and stock is not depreciated. Inside the company, nothing has been bought or sold, so the assets keep the basis they had the day before. The price the buyer paid is recovered for tax purposes only when it later sells the shares. This is why the same headline price is not worth the same to a buyer under the two structures. No rate is given here on purpose: rates depend on the entity, the asset, the holding period and the state, and they change; the mechanism does not. ## How is the purchase price allocated on Form 8594? In a United States asset sale, buyer and seller divide the price among seven classes of assets using the residual method, and each reports that division to the Internal Revenue Service on Form 8594. According to the form's instructions, both the purchaser and the seller generally must file it, attached to the income tax return for the year of the sale, when a group of assets that makes up a trade or business is transferred and the purchaser's basis is determined wholly by the amount paid. The residual method works downwards. The price is first reduced by Class I assets, which are cash and general deposit accounts, and what remains is allocated to Class II, then Class III, and so on, each class in proportion to the fair market value of its assets. The instructions set a ceiling: the amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. Whatever is left after Class VI falls into Class VII, goodwill and going concern value. Take a worked example with illustrative figures. A buyer purchases the assets of a distribution business for $5,000,000. The seller keeps its cash, and the buyer assumes no liabilities, which keeps the arithmetic simple; assumed liabilities would normally count as part of the consideration. | Class | What the class holds | Allocated in the example | | --- | --- | --- | | I | Cash and general deposit accounts | $0 | | II | Actively traded personal property, certificates of deposit, foreign currency | $0 | | III | Debt instruments, including accounts receivable, and assets marked to market at least annually | $400,000 | | IV | Inventory and other property held for sale to customers | $600,000 | | V | Assets in no other class, such as equipment, furniture, buildings and land | $1,200,000 | | VI | Section 197 intangibles other than goodwill and going concern value: here a customer list and a trade name | $800,000 | | VII | Goodwill and going concern value | $2,000,000 | | **Total** | | **$5,000,000** | The identified assets in Classes III to VI add up to $3,000,000 at fair market value, so the residual in Class VII is $2,000,000, or 40% of the price. If the parties later agreed a price of $5,400,000 for the same assets, Classes III to VI would stay at $3,000,000, because they are already at fair market value, and goodwill would rise to $2,400,000. The allocation is where the two sides' tax interests meet again. Within the limits of fair market value, a seller generally wants more of the price on assets that produce capital gain, and a buyer generally wants more on assets it can deduct quickly. Valuations are estimates within a range, so there is room to negotiate, and the Internal Revenue Service's publication on basis states that when buyer and seller agree in writing on the allocation or on the fair market value of any asset, the agreement is binding on both parties unless the agency determines the amounts are not appropriate. Most purchase agreements therefore attach an allocation schedule and require both sides to file consistently. If the price later changes, for instance through an earn-out or a price adjustment, the party affected files the form again for the year of the change. ## What is a section 338(h)(10) election? A section 338(h)(10) election is a joint choice by the buyer and the sellers of a United States corporation to have a purchase of its stock treated, for federal income tax purposes, as a sale of its assets. Legally the buyer still acquires the shares; for tax, the transaction is recast. In outline, and following the Internal Revenue Service's instructions for Form 8023, the form on which the election is made: - The starting point is a qualified stock purchase: the purchase by a corporation of at least 80% of the total voting power and value of the target's stock within a 12-month acquisition period. - Under a section 338 election, the target is treated as having sold all of its assets on the acquisition date and as a new corporation that bought them the day after. The "old" target recognizes the gain or loss on that deemed sale; the "new" target holds the assets with a basis that reflects the price. - Under the (h)(10) variant, the target is generally treated as making the deemed sale and then liquidating, and the selling shareholders are treated consistently with that. It is available where the target is an S corporation or is bought out of a selling consolidated or affiliated group. - The election is made jointly. For an S corporation target, every shareholder must sign, including shareholders who did not sell their stock in the purchase. - The form is due by the 15th day of the 9th month after the acquisition date. A buyer that needs the company intact for its licences or contracts can still obtain the stepped-up basis of an asset purchase. The cost falls on the sellers, who are taxed as if assets had been sold, so the election is normally a negotiated term with a price attached, and eligibility is checked before the letter of intent fixes the structure. ## What price adjustment makes a seller indifferent between the two structures? The price adjustment that makes a seller indifferent is the increase in an asset-sale price that leaves the seller with the same amount after tax as the share sale would have, and it is larger than the tax difference itself because the increase is taxed too. Advisers call the computation a gross-up, and it applies equally to a section 338(h)(10) election. Continue the example. The buyer offers $5,000,000 and wants assets. The sellers' advisers compute the tax under each structure on the sellers' own facts. The tax figures below are illustrative amounts chosen to show the mechanism, not the product of any real rate. | | Share sale at $5,000,000 | Asset sale at $5,000,000 | Asset sale at $5,400,000 | | --- | --- | --- | --- | | Price | $5,000,000 | $5,000,000 | $5,400,000 | | Sellers' tax (illustrative) | $900,000 | $1,200,000 | $1,300,000 | | **Sellers keep after tax** | **$4,100,000** | **$3,800,000** | **$4,100,000** | At the same price, the asset sale costs the sellers $300,000 more in tax. Adding $300,000 to the price does not close the gap, because the addition is itself taxable: in the example, the extra price carries a further $100,000 of tax. The adjustment that restores $4,100,000 after tax is $400,000, an increase of 8% on the offer. Whether the buyer will pay it depends on what the step-up is worth to the buyer. Suppose the company's assets carry a tax basis of $1,400,000 inside the company. A share purchase leaves that basis where it is; an asset purchase at $5,000,000 replaces it with $5,000,000, a step-up of $3,600,000 to be deducted over the years ahead. The buyer's advisers discount the resulting tax savings to today's value. If that value is an illustrative $550,000, paying $400,000 more leaves the buyer $150,000 better off than buying shares, and any adjustment between $400,000 and $550,000 leaves both sides ahead. If the value were $350,000, the buyer would be $50,000 worse off, no adjustment would work for both, and the deal would more naturally be done by shares. ## What happens to employees in each structure? In a share sale the employees stay employed by the same company on the same contracts, while in an asset sale they have to move to a new employer, and the way they move depends on the country. In some countries the buyer simply offers new employment to the people it wants and the seller ends the old contracts; in others the law moves the employees with the business whether or not the parties provide for it. The United Kingdom is an example of the second kind. Its rules are the Transfer of Undertakings (Protection of Employment) regulations, known as TUPE. According to the United Kingdom government's guidance, the protection applies when a business or part of a business moves from one employer to another, and the identity of the employer must change for the transfer to be protected. Where it applies, the employees' jobs usually transfer to the new employer, their employment terms and conditions transfer, and continuity of employment is maintained. The size of the business does not matter, and the part of the business that is transferring must be in the United Kingdom, even if the head office is elsewhere. A buyer of a United Kingdom business by assets cannot treat the workforce as one more item to select or leave out, and the cost of the employees' existing terms belongs in the price. A buyer of shares does not change the employer at all, so the question of a transfer does not arise in the same way, but every existing term, accrued entitlement and pending claim stays in the company it now owns. Many other countries have their own transfer rules, with different triggers and different duties, so employment counsel in each country where staff are based is part of structuring an asset deal. ## Can a buyer of assets still inherit the seller's liabilities? A buyer of assets can still be held responsible for some of the seller's liabilities, because the freedom to leave liabilities behind has limits set by statute and by the courts. The general rule in most legal systems is that a buyer of assets is liable only for what it agreed to assume. In general terms, the limits fall into four groups. Courts in the United States commonly look past the form of the deal where the buyer expressly or impliedly assumed the liability, where the transaction amounts in substance to a merger, where the buyer is a mere continuation of the seller with the same owners and management, or where the transfer was made to escape creditors. The tests differ from state to state. Statutes attach certain obligations to the business or its assets whoever owns them: employee rights in countries with transfer rules, some tax debts, and some environmental obligations tied to land. Security interests and liens follow the asset until they are released. And contracts taken over by assignment come with their past performance. ## How do contracts, licences and permits move across? In an asset sale each contract, licence and permit has to be transferred or replaced one by one, while in a share sale they stay with the company unless a clause or a regulator says a change of owner needs approval. A customer or supplier contract moves to an asset buyer by assignment or by a new agreement among the three parties, usually called a novation, and many contracts forbid assignment without the other party's consent. Leases of premises almost always need the landlord's agreement. Obtaining consents takes time and gives each counterparty a chance to reopen its terms. In a share sale the contracting party is unchanged, so consent is needed only where the contract contains a change-of-control clause, which is common in financing documents, key supply contracts and franchise agreements, and has to be searched for in diligence. An operating licence or a regulatory authorization is typically granted to a named legal entity and is often not transferable; an asset buyer applies in its own name and may not be able to trade until it is granted. A share buyer keeps the licence because the holder has not changed, although regulated sectors frequently require approval or notification of a new controlling owner. Registered intellectual property, vehicles and real estate each need their own transfer filing in an asset deal. The way the price is paid follows the same split, in brief: in a share sale the money goes to the shareholders, often several of them in agreed proportions, and in an asset sale it goes to the company, which settles what it owes before anything reaches its owners. Retentions and deferred amounts exist in both. ## Which structure fits which situation? An asset sale fits where the buyer wants only part of what the company holds or wants distance from its history, and a share sale fits where the value sits in things that cannot easily be moved or where the tax cost of selling assets cannot be covered by the price. | Situation | Structure that usually fits | Why | | --- | --- | --- | | A division or product line carved out of a larger company | Asset sale | There are no separate shares to sell unless the division is first placed in its own company | | A company with a significant known or suspected liability | Asset sale | The buyer can leave the liability with the seller, within the limits described above | | Value concentrated in a licence, permit or contracts that are hard to assign | Share sale | The holder of the licence and the contracting party do not change | | Sellers for whom an asset sale is much more heavily taxed | Share sale, or assets at an adjusted price | The gap is closed by structure or by a gross-up, whichever costs less | | A United States target that qualifies for a section 338(h)(10) election | Share sale with the election | Legal continuity for the buyer with the tax result of an asset purchase | | Sellers who want to keep some assets or cash in the company | Asset sale | Whatever is not listed stays where it is | The structure is proposed in the letter of intent and tested during diligence. A buyer that set out to buy shares may switch to assets when a liability surfaces; a buyer that wanted assets may accept shares when a key contract turns out not to be assignable, in exchange for a lower price, stronger indemnities or a larger retention. Each switch changes both sides' tax position, so price and structure are negotiated together.