Taxation

When selling or acquiring a business, one of the most important structural decisions is whether the transaction should be structured as a stock sale or an asset sale. Each structure has distinct legal and tax implications for both buyers and sellers — and those differences can significantly impact the after-tax proceeds of the deal.

At Vanguard Legal PLLC, we regularly guide clients through business sale transactions, helping them understand how different structures affect both legal obligations and tax outcomes.

In a stock sale, the buyer purchases ownership interests in the company (e.g., the shares of a corporation or the membership interests in an LLC). The business entity itself continues to exist and retains ownership of all of its assets and liabilities.

In contrast, an asset sale involves the buyer purchasing specific assets of the business (and sometimes certain liabilities) directly from the company. The seller retains the legal entity and may dissolve it after the sale.

Buyers typically prefer asset deals because they can achieve a step-up in the tax basis of the acquired assets, allowing greater depreciation and amortization deductions in the future. In a stock sale, the company’s existing tax basis in its assets carries over, denying the buyer these benefits.

Buyers may also be wary of inheriting undisclosed or contingent liabilities when they acquire stock, since the legal entity (and its history) remain intact.

Sellers typically prefer stock sales because they usually trigger capital gains tax treatment and avoid double taxation. For corporations, selling assets can create two layers of tax — one at the corporate level when assets are sold, and another when proceeds are distributed to shareholders. A stock sale generally results in a single level of tax to the shareholders.

One significant advantage available in certain stock sales is the potential gain exclusion under Internal Revenue Code §1202.

If the stock being sold qualifies as Qualified Small Business Stock (QSBS), shareholders may exclude up to 100% of the gain from federal income tax (subject to limitations), provided the following conditions are met:

• The corporation is a C corporation engaged in an active trade or business (certain industries are excluded).

• The stock was originally issued after August 10, 1993 and held for more than five years.

• The corporation’s gross assets did not exceed $50 million at the time the stock was issued.

Section 1202 can produce substantial tax savings for founders and early investors, but eligibility rules are technical — careful analysis and documentation are essential.

• Evaluate QSBS Eligibility Early: If your business may qualify under §1202, maintaining proper records and corporate structure is critical.

• Consider Installment Sales: Spreading the purchase price over time can defer gain recognition, easing cash-flow impact.

• Maximize Basis Adjustments: Ensure that basis calculations reflect any prior contributions or income allocations.

• Coordinate with the Buyer: In some cases, buyers and sellers may negotiate partial §338(h)(10) elections or other structures to balance tax interests.

• Leverage Loss Carryforwards: Net operating losses (NOLs) or capital loss carryforwards may offset gain.

• Plan for State Taxes: State treatment of capital gains and QSBS exclusions can vary — modeling total after-tax impact is important.

Beyond tax issues, stock sales raise several legal considerations:

• Representations and warranties are often broader, since the buyer assumes all liabilities.

• Indemnification provisions are critical to protect against unknown obligations.

• Consents and approvals from lenders or regulatory bodies may still be required, depending on contracts and licenses.

Vanguard Legal assists clients in negotiating and drafting stock purchase agreements, ensuring that both legal and tax consequences are properly addressed.

At Vanguard Legal PLLC, we combine our corporate transactional experience with deep understanding of U.S. and international tax issues to guide business owners through every stage of a sale or acquisition.

We work closely with your tax accountants and financial advisors to:

• Evaluate the tax consequences of a proposed stock sale,

• Explore QSBS eligibility and other potential exclusions,

• Structure transactions to minimize taxes and legal risks, and

• Ensure the sale documentation reflects the parties’ intended tax treatment.

Whether you are selling shares in a closely held corporation or acquiring a strategic equity stake, our attorneys in Houston and Dallas are committed to achieving a tax-efficient, legally sound outcome.