When a business changes hands, the deal is usually structured either as a sale of the business's assets or as a sale of the ownership of the company itself. The structure affects taxes, liabilities, and the work needed to close.
Asset sale
The buyer purchases specific assets — equipment, inventory, contracts, IP, goodwill — and agrees to assume only the liabilities it chooses. The selling company remains in existence with whatever wasn't sold.
- Buyers often prefer it because they can choose what they take on.
- More transfer work: contracts may need counterparties' consent to assign, and permits or licenses may need to be re-issued.
- Tax reporting: in many asset acquisitions, buyer and seller each file IRS Form 8594 to report how the purchase price is allocated among the assets.
Stock or membership interest sale
The buyer purchases the shares of a corporation (or the membership interests of an LLC). The company itself doesn't change — it keeps its contracts, permits, history, and liabilities, known or unknown.
- Sellers often prefer it for a cleaner exit and, depending on the entity, potentially different tax treatment.
- Fewer transfers, although "change of control" clauses in contracts may still require consent.
- More diligence for the buyer, since liabilities come with the company, and more reliance on representations, warranties, and indemnities.
Taxes drive a lot of the decision
The tax result differs by structure and by entity type (C corporation, S corporation, LLC). Buyers and sellers should involve their CPAs early, because the structure is hard to change once a letter of intent is signed.
California: successor liability for sales tax
If a seller owes California sales and use tax, the buyer of the business or its stock of goods is required to withhold enough of the purchase price to cover it until the seller produces a receipt or a certificate from the CDTFA showing nothing is due. A buyer who fails to withhold can become personally liable up to the purchase price. CDTFA describes how to request a tax clearance before closing.
Non-competes in a sale
California generally voids non-competes, but Business and Professions Code § 16601 permits certain non-compete agreements by owners who sell their business or ownership interest, within the statute's limits.
The usual sequence
- Letter of intent: price, structure, key terms, exclusivity
- Due diligence
- Definitive agreement and disclosure schedules
- Consents, clearances, and closing deliverables
- Closing and transition