What are the primary structures for selling a business?
Takeaway: The sale of your company will be structured as either a stock sale, an asset sale, or a merger, and the choice between these three legal structures has profound and dramatically different tax consequences for you and your stockholders.
When a buyer agrees to acquire your startup, the deal must be structured in a specific legal form. There are three primary legal structures for an M&A transaction: a stock sale, an asset sale, and a merger. While the business outcome may seem the same—the buyer ends up with your company—the legal mechanics and, most importantly, the tax consequences of each structure are vastly different.
The choice of deal structure is a major point of negotiation in any M&A transaction, as the buyer and the seller often have competing interests.
1. The Stock Sale
How it Works: This is the simplest structure. The buyer purchases all of the outstanding shares of stock directly from your company's stockholders. Your company continues to exist as a legal entity, but it is now a wholly-owned subsidiary of the acquiring company.
The Tax Treatment (Favorable for Sellers): For the selling stockholders, this is usually the most favorable structure. Any gain you receive from the sale of your stock is typically taxed at the lower long-term capital gains rate. It is also the only structure that preserves the potential for the powerful QSBS tax exclusion.
The Buyer's Position: Buyers are often less favorable to a stock sale because they inherit all of the company's past liabilities, known and unknown. They also do not get to "step-up" the tax basis of the company's assets.
2. The Asset Sale
How it Works: In an asset sale, the buyer does not buy your company's stock. Instead, they purchase the specific assets of the company that they want—the intellectual property, the equipment, the customer contracts—and they may assume certain specific liabilities. Your original corporate entity is left behind as an empty shell, which you then liquidate.
The Tax Treatment (Unfavorable for Sellers): This structure is often a disaster from a tax perspective for a C-Corporation. It can result in double taxation. The corporation first pays a corporate-level tax on the gain from the sale of its assets. Then, when the remaining proceeds are distributed to the stockholders, they pay a second, personal-level tax on that distribution.
The Buyer's Position: Buyers often prefer an asset sale. It allows them to "cherry-pick" the assets they want and leave behind any unknown liabilities. It also allows them to "step-up" the tax basis of the acquired assets, which can provide them with significant future tax benefits.
3. The Merger
How it Works: A merger is a more complex legal transaction where two companies are combined into one. In a startup acquisition, this is typically structured as a "reverse triangular merger," where the buyer creates a new subsidiary, and your company merges into that subsidiary.
The Tax Treatment (Generally Favorable for Sellers): For tax purposes, a merger is most often treated like a stock sale, resulting in a single layer of tax at the long-term capital gains rate for the sellers and preserving QSBS eligibility.
Because of the significant tax advantages, as a founder and a seller, you will almost always advocate for the transaction to be structured as a stock sale or a merger. An asset sale should be strongly resisted unless the buyer is willing to "gross up" the purchase price to compensate you for the unfavorable tax consequences or the context is a distressed sale.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.