Why it matters
The headline price is only half the picture. Two offers at $24 million can leave you with very different amounts after tax, depending on the structure, the type of company you own and how the price is allocated. The structure is usually set in the letter of intent, so it needs to be understood before then, not left to the lawyers at the end.
The main differences
| Stock sale | Asset sale | |
|---|---|---|
| What is sold | Your shares in the company | The company's assets, chosen by the buyer |
| Liabilities | Stay with the company, so pass to the buyer | Mostly stay with the seller's company |
| Contracts, licences, permits | Usually continue automatically | Often need consent or re-application |
| Buyer's tax benefit | Takes over the old tax basis | Steps up the basis; deducts goodwill over 15 years |
| Seller's tax (C corporation) | Taxed once, as capital gain | Taxed twice: company, then shareholder |
| Seller's tax (S corporation) | Capital gain | Mostly capital gain; part may be ordinary income |
| Indemnity demands | Usually higher, since the buyer inherits everything | Usually lower |
C corporations: the double tax
If your company is a C corporation, an asset sale is taxed twice: first the company pays corporate tax on the gain from selling its assets, then you pay tax again when the remaining cash is paid out to you. A stock sale is taxed once, to you.
C corporation owners may also benefit from the qualified small business stock (QSBS) rules in Section 1202, which can exclude some or all of the gain on a stock sale from federal tax if conditions are met, including how long you have held the shares and the company's size when they were issued. The rules were expanded in July 2025; for older shares the exclusion is generally capped at $10 million of gain per shareholder, and $15 million for shares issued after July 4, 2025, which can also qualify for a partial exclusion after three or four years. Your tax advisor can tell you whether your shares qualify.
S corporations and LLCs: smaller gap, still real
S corporations and LLCs taxed as partnerships are not taxed twice, so the gap is narrower. But in an asset sale, the part of the price allocated to equipment that has been depreciated is taxed as ordinary income (depreciation recapture), at rates up to 37% rather than the 20% capital gains rate. In a capital-intensive manufacturer, that can be a meaningful amount.
For S corporations there are well-established ways to give the buyer the tax benefits of an asset purchase while the seller sells stock: a Section 338(h)(10) or 336(e) election, or a pre-sale reorganization (an "F reorganization"). These shift some tax cost to the seller, which is why the price should reflect it.
A worked example
Our illustrative company is sold for $24 million. Assume its assets have a tax basis of $4 million and the owner's shares have a tax basis of $1 million. Federal tax only, at a 21% corporate rate and up to 23.8% on the owner's capital gain; state taxes, fees and any QSBS exclusion are left out.
| If the company is a C corporation | Stock sale | Asset sale |
|---|---|---|
| Price | $24.0m | $24.0m |
| Corporate tax on asset gain ($20m at 21%) | none | $4.2m |
| Cash reaching the owner before personal tax | $24.0m | $19.8m |
| Owner's capital gains tax (23.8%) | $5.5m | $4.5m |
| Owner keeps | about $18.5m | about $15.3m |
In this example the C corporation owner keeps about $3 million more from a stock sale. For an S corporation with the same numbers the gap is much smaller, and depends mainly on how much of the price is allocated to depreciated equipment. Figures are illustrative; your own numbers need a tax advisor.
The structure of a sale can change what you keep by millions. Talk it through before a buyer sets the terms.
Book a confidential callHow to bridge the gap with a buyer
- Price the structure. If a buyer insists on an asset deal, the extra tax it costs you can be added to the price (a gross-up), since the buyer gains future tax deductions in return.
- Negotiate the allocation. In an asset sale, how the price is split between equipment, goodwill and non-compete payments affects both sides' tax. More to goodwill is usually better for the seller.
- Use the S corporation tools. A 338(h)(10) election or F reorganization often gives both sides most of what they want.
- Personal goodwill. In some cases, part of the value belongs to the owner personally (relationships, reputation) rather than the company, and can be sold directly, avoiding corporate tax. This needs careful support.
- Plan early. Converting from a C to an S corporation, or other restructuring, takes years to deliver full benefits (S corporations that converted within the last five years can still face corporate-level tax on built-in gains).
How ExitBuy helps
We raise the structure with buyers early, model the after-tax result of each offer with your tax advisor, and negotiate the structure, allocation and any gross-up as part of the price, before the letter of intent fixes them. An offer that looks highest before tax is not always highest after it.
Frequently asked questions
Which is better for me, an asset sale or a stock sale?
Usually a stock sale for the seller, especially for a C corporation. But a higher price for an asset sale can more than make up the difference. Compare after-tax proceeds.
Why do buyers want an asset deal?
They can deduct the price paid for goodwill and equipment against future taxes, and they avoid inheriting liabilities they don't know about.
Can I sell stock if my contracts can't be transferred?
Often yes. A stock sale usually keeps contracts and licences in place, although some contracts require consent on a change of control. Check key customer contracts early.
What is a 338(h)(10) election?
A tax election that lets a stock sale of an S corporation (or a subsidiary) be treated as an asset sale for tax purposes, giving the buyer the stepped-up basis.
Does the structure affect my employees?
In an asset sale, employees technically move to the buyer's company and are rehired; in a stock sale, their employer stays the same. In practice, buyers usually keep the workforce either way.
Mauro Terrinoni, CFA, founder of ExitBuy Co. 25 years in investment banking and private equity, including at JP Morgan, Citigroup and Fortress Investment Group, and has bought, run and sold a company as its owner.
General information only, not investment, legal or tax advice. Figures are illustrative. Tax rules change; confirm current law with your own advisors.
Sources: Grant Thornton, Explaining enhanced Section 1202 benefits