The structure of transaction: Should you buy the stocks or assets of a practice?

It is rare when a buyer or the buyer’s attorney would or should accept structuring the deal as a stock purchase (when the seller is a corporation) or interest purchase (when the seller is a limited liability company LLC). The main reason is that in stock purchases usually all the previous liabilities of the corporation or company are automatically transferred from the seller to the buyer, whether said liabilities are known or unknown.

When you purchase the stocks of a shareholder in a corporation or an interest of a member in a LLC, you are stepping in the shoes of the previous shareholder or member from whom you purchased the stocks or interest; therefore, the corporation or the LLC remains the same entity that had the previous liabilities and you will now be holding the bag as the new shareholder or member of the same old corporation or LLC that carries these liabilities.

There are also tax consequences that should be carefully considered in deciding how to structure the deal. Conversely, in an asset purchase, the buyer usually remains liable for certain liabilities that s/he accepts to be responsible such as the remainder of a loan for certain equipment or other contracts that buyer expressly agrees to adopt; otherwise the contract should include a language that avoid all other liabilities. The above is not an exhaustive list of the pros and cons of structuring a transaction as a stock purchase versus an asset purchase and it is highly recommended that you have the benefit of legal counsel for taking any action that may be cause severe irreversible damage to you.

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