Chapter 48 - § 48.1 • CHOOSING A STRUCTURE: MERGERS, STOCK SALES, AND ASSET SALES

• Jurisdiction: Colorado

§ 48.1 • CHOOSING A STRUCTURE: MERGERS, STOCK SALES, AND ASSET SALES

The purchase or sale of a corporation typically is accomplished through one of three legal structures: a merger, stock sale, or asset sale. Deciding which structure to choose depends significantly on legal considerations. Business owners might not be aware of the legal subtleties involved in structuring a transaction, so it is important for counsel to communicate to the client the pros and cons of each respective structure.

In general, structure will be driven by four factors: (1) tax considerations; (2) the portion of the seller's business to be acquired; (3) the legal effects of the transaction, as well as the relative complexity or simplicity presented by different structures; and (4) corporate approval requirements. The following discussion considers each of these four factors.

§ 48.1.1—Tax Considerations

Acquirers often prefer asset purchases to stock purchases for tax reasons. For example, where the depreciated book value of the assets is less than their fair market value, an acquirer in an asset deal takes a tax basis in the acquired assets equal to the amount paid for them. This allows for greater depreciation, which, in turn, can be offset against profits to reduce tax liability. Conversely, a seller usually seeks to avoid the tax implications of an asset sale. Not only must the seller "recapture" the excess depreciation by paying taxes on the difference between fair market value and depreciated book value, but if it is a C corporation, seller shareholders are subject to double taxation.

Under the tax laws, a merger may be treated as either an asset sale or stock sale, depending on the entity's structure.⁴ Under the Internal Revenue Code, a variety of other structures may qualify, in whole or in part, as non-taxable "reorganizations," particularly where the seller or seller shareholders receive stock as consideration for the sale.⁵ Generally, merger and stock purchase transactions are not taxable for purposes of sales and use taxes.⁶ A discussion of these provisions is beyond the scope of this chapter. The prudent practitioner will always consult a tax specialist (accountant or tax lawyer) for assistance with the tax treatment of these different structures.

§ 48.1.2—Portion of Business Acquired

Asset sales are appropriate where an acquirer is purchasing less than the entire business of the seller. In such cases, the acquirer takes only the needed assets; the rest are left behind...