By Tom Pedreira

If you are buying a business that is organized as a limited liability company, one of the considerations to take into account is whether to do an "asset purchase" or a purchase of membership interests (akin to a "stock purchase" were the business a corporation).

Assets Sale versus Sale of Membership Interests. In an asset sale, it is as though the purchaser walks into the business, picks up all the inventory and equipment, and walks out the door to start a new business. With the sale of membership interests (sometimes called "units"), it is as though the owners simply give you the keys to take over the existing business. There are pluses and minuses to both situations.

Typically, a buyer would want to do an asset sale for reasons that include the following:

• The assets are typically sold free and clear of any liabilities.
• The purchaser does not assume any liabilities, debts or obligations of the existing corporation, all of which stay with the sellers.
• By purchasing the assets, the purchaser will usually get a step up in tax basis on the assets being acquired. This can be more beneficial because, among other things, the buyer is able to depreciate the assets at the full value of their acquisition. (In a purchase of the membership units, the basis of these assets stays with the LLC. If there is no remaining basis, there is nothing to depreciate.)
• The purchaser in an asset sale does not have to worry about any other "baggage" from the previous business such as contingent liabilities. Potential issues in this regard could include a payroll taxes, creditor claims, insurance claims, and so on.

A seller would usually prefer the sale of membership units for reasons that would include the following:

• Tax consequences to the seller may be more favorable. Rather than selling assets, the seller is transferring a membership interest (similar to selling stock) so that the seller may be able to realize capital gains at a lower tax rate rather than ordinary income (as may be the case on an asset sale).
• It can be easier. Rather than having to liquidate and dissolve an entity, a seller can simply transfer ownership of the existing entity to the purchaser and be done with it. There are not the same worries with regard to transferring title to assets, assisting the purchaser with securing new licenses, permits, etc.
• It may not necessary to assign contracts and other legal obligations since they remain with the entity that is being sold rather than a new one that is being formed.

Other Considerations. If a buyer wants to continue using the same business name, it may be easier to step into the shoes of an existing business by a purchase of membership units rather than having to form a new entity, obtain new licenses, secure new contracts, etc.

While the tax consequences may work to the disadvantage of a buyer in purchasing membership units, the adverse tax consequences can be offset or managed in other ways. For example, the adverse tax consequences based on the allocation of the purchase price. For example, a buyer may be able to negotiate allocating a portion of the purchase price toward the covenant not to compete.

Contingent liabilities are always a concern in purchasing membership units since the purchaser is taking over the existing business. However, by undertaking extensive due diligence and perhaps getting personal guarantees from the sellers, a purchaser may feel comfortable enough that should not be surprises.

There are a lot of other considerations to take into account. Furthermore, any prospective purchaser should also talk with an accountant before committing to a deal. The accountant should be able to provide advice on the most favorable tax advantage under the circumstances in structuring the deal.

More information on what to consider in starting a new business can be found in the following article on this website: Key Considerations in Forming a New Business.

Tom Pedreira, a business attorney with the Mikkelborg firm, has formed corporations and LLC's for many clients.  In having done so, his goal has been, and constinues to be, providing the best legal services he can as cheaply as possible. At the same time, he supports clients using online resources for services in this area.  However, he is cautious to tell them to be mindful that such services may be cheaper, but they are not a substitute for competent legal advice.