Preparing your company nowadays is an easy task. You can easily get marketing ideas on the internet. You can research and gather more information easily. You can attend short courses to improve your skills. You can find better and cheaper suppliers on the World Wide Web. You can contact advertisers to promote your product or services.

However, there is one thing you can’t read in books or learn on business courses, which is the legal services of business attorneys. Some marketing and sales books can help you build new strategies, but only business attorneys can give you legal advice concerning your company. If you are building up a new business, you don’t want to mess up in court. Even some of the greatest and the biggest businessmen that failed to seek the counsel of business attorneys, crashed.

Maybe you have the best talent for a particular company, you may have the capital, you may have the workforce, and you may have the knowledge- but business laws can make for a big downfall. Here in California, you have to be aware of certain business laws. California Business law may cover fraud and deceptive practices, contract disputes, refusal of insurance claims, bankruptcy, and the right of the creditor, partnership, and corporate disputes. There are also specific laws for real estate, oil, and gas business and business sales and purchases. Also, you should familiarize yourself with draft and review of contracts and leases, employment contracts and even insurance policies.

These tasks are not for businesspersons but rather for business lawyers that have the wide experience as well as educational background. You should seek legal advice with business lawyers. Though you might not need permanent business attorneys, you can always hire one if you ever need them. You don’t necessarily need an attorney who knows every single law, but rather a marketable business lawyer. This business lawyer must be familiarized with California business law and should know what business you’re into. The business lawyer should not only assist you in court but also give you legal advice whenever you need it.

Note, the following summary assumes the business is a corporation, as opposed to a sole proprietorship, general partnership, limited partnership, limited liability company, or limited liability partnership; the reason being, that only corporations have “stock”, and thus one can’t enter into a “stock purchase agreement” without there being a corporation at hand. Many of the issues below also apply to these other entity types, but for more specific information please contact Rassman Law today.

Tax Issues

Stock Purchase Agreement:

• From the selling shareholder’s perspective, there is only one (1) level of tax, namely a capital gains tax that the selling shareholder will pay on the difference between the sales price and the selling shareholder’s basis in his/her stock. If the corporation is a c-corporation, a stock purchase agreement generally results in less tax to the selling shareholder than results from the two (2) levels of tax incurred in an asset purchase agreement (see below).
• From the buyer’s perspective, the corporation has a “carry-over basis” in its assets; as a result, the corporation continues to depreciate its assets on the same schedule as existed prior to the transaction. Generally, a “carry-over basis” is less favorable to a buyer than a “step-up basis” that results from an asset purchase agreement (see below).

Asset Purchase Agreement:

• From the selling shareholders’ perspective, if the corporation is a c-corporation, there would be two (2) levels of tax to the selling shareholder: 1) first, the corporation would pay a tax on the “gain” resulting from sale of its assets; and 2) second, the selling shareholder would pay a tax on the dividend he/she receives from the corporation after the sale.
• From the buyer’s perspective, he/she will receive a “step-up basis” in the assets he/she acquires, allowing greater depreciation deductions for the acquired assets. The buyer may also be able to amortize the “goodwill” purchased in the transaction, again allowing greater depreciation.

Asset and Liability Issues

Stock Purchase Agreement:

• From the buyer’s perspective, because he/she takes the corporation as he/she finds it, the corporation continues to own all assets, and carry all liabilities (known and unknown), that existed prior to the transaction. The risk of assuming all liabilities (known and unknown) of the corporation often requires additional due diligence from the buyer and results in greater legal fees for the buyer.

Asset Purchase Agreement:

• From the buyer’s perspective, he/she can choose which assets to acquire from the corporation, and which liabilities to exclude; as compared to a stock purchase agreement wherein all assets and liabilities remain in the acquired corporation.
• From the selling shareholder’s perspective, he/she may have to wind down the corporation after its assets are purchased, which includes paying any liabilities not assumed by the buyer and dissolving the corporation.

Titling Issues

Stock Purchase Agreement:

• From the buyer’s perspective, because he/she takes the corporation as he/she finds it, he/she may not have the “titling” issues that may exist after an asset purchase agreement (see below).

Asset Purchase Agreement:

• From the buyer’s perspective, he/she may have to re-title the assets purchased, assign contracts entered into by the corporation (e.g. leases, employment agreements, etc.) that the buyer assumes, assign permits / licenses bought from the corporation, etc. – all of which may result in greater legal fees for the buyer.

Securities and Bulk Sales Laws

Stock Purchase Agreement:

• Stock purchase agreements may involve Federal and California securities issues, resulting in greater legal fees and administrative requirements.

Asset Purchase Agreement:

• Asset purchase agreements may involve bulk sales laws, resulting in greater legal fees and administrative requirements.

Minority Shareholder Issues

Stock Purchase Agreement:

• If the corporation has more than one (1) shareholder, complications may arise obtaining the consents of minority shareholders, resulting in greater legal fees and administrative requirements.

Asset Purchase Agreement:

• Even if the corporation has more than one (1) shareholder, less complications arise with respect to minority shareholders under an asset purchase agreement than under a stock purchase agreement.

Summary: For both tax and liability reasons, you can see that sellers generally prefer Stock Purchase Agreements while buyers generally prefer Asset Purchase Agreements, though of course every transaction is different and this is not a bright-line rule.