An acquisition offer arrives, and most founders read the headline number first. The bigger question is whether the buyer wants an asset purchase vs. a stock purchase, because that choice decides how much of the purchase price you keep. In reality, the wrong structure can mean paying tax twice, keeping liabilities you thought you sold, or losing a federal tax exclusion you earned.

I’m a startup lawyer and a two-time software founder, and structure is one of the first terms I check in any letter of intent (LOI). Here is how each works, who it favors, and where to push back.

What Is the Difference Between an Asset Purchase and a Stock Purchase?

The difference comes down to what the buyer actually owns the day after closing.

In a stock purchase, you and your other stockholders sell your shares to the buyer. The legal entity stays exactly as it was, with its contracts, bank accounts, tax identification number, and track record intact. Only the upstream owners (the stockholders) change, so every asset and every liability, known or unknown, stays inside the company the buyer now controls.

In an asset purchase, your company sells a defined list of assets to the buyer, often to a new entity the buyer forms for the deal. For a software as a service (SaaS) company, that list usually includes the code, trademarks, domain names, customer contracts, and goodwill, and the purchase agreement states which liabilities the buyer assumes. Everything the buyer did not take, including every liability it did not agree to assume, stays with your company.

Why Do Buyers Push for an Asset Purchase?

Buyers have two reasons to prefer an asset deal, and both translate into money.

The first is tax. In an asset purchase, the buyer’s basis in what it acquires equals what it paid, plus the liabilities it assumes, which opens up fresh depreciation on equipment and fresh amortization on goodwill and other qualifying intangibles. Section 197 of the Internal Revenue Code amortizes those intangibles over 15 years, which gives the buyer deductions a plain stock purchase does not.

The second is liability control. The buyer chooses which liabilities it assumes, usually limited to obligations arising after closing under the contracts it takes over, and leaves the rest with your company.

Both sides also have to agree on how the purchase price is allocated across the assets. Section 1060 of the Internal Revenue Code governs that allocation, and the Internal Revenue Service (IRS) instructions for Form 8594 say the buyer and the seller generally must each file the form with their tax returns. Different asset classes can be depreciated and taxed differently in your hands, so negotiate the allocation in the purchase agreement instead of leaving it to the buyer.

When Buyers Accept a Stock Deal

Buyers do take stock deals, usually when they want the business to keep running without disruption. If the plan is to keep the existing team, customer relationships, and vendor terms exactly as they are, a stock purchase avoids reassigning everything.

Asset deals show up more often when the buyer values what the company owns more than what it earns. A distressed company, or a product the buyer plans to fold into its existing business, tends to be bought as assets.

Why Do Sellers Prefer a Stock Purchase?

A stock sale is usually the cleaner path for the founder on the selling side of the table.

• ●One level of tax. You sell your shares and pay capital gains tax on the gain, with nothing taxed at the company level first.
• ●A complete exit. The buyer takes the whole company, so you are not left holding an entity with leftover debts, tax filings, and wind-down costs.
• ●Fewer consents. Contracts, permits, and accounts stay with the company, which means fewer customer conversations before closing, subject to any change-of-control clauses.
• ●QSBS stays available. If your shares qualify, the exclusion applies to the gain on the sale of that stock.

The tradeoff is that the buyer inherits every liability in the company, known or unknown. Buyers protect themselves with representations and warranties, indemnification, and escrow, so a stock deal moves the negotiation from structure to those terms.

My rule for sellers in a stock deal: treat your disclosure schedules as your insurance policy. If you disclose an issue or potential liability, the buyer can’t say they didn’t know about it and will have a hard time claiming a breach of the representations and warranties over it later, so if in doubt, disclose everything.

How Much More Tax Can an Asset Sale Cost a C Corporation Founder?

For a C corporation, the gap between the two structures can run into the millions. Here is a simplified, federal-only illustration.

Assume a hypothetical Delaware C-Corp sells for $20,000,000, and to keep the math clean, assume the company’s assets and the founders’ shares both have a tax basis of zero. The federal corporate income tax rate is 21% under Section 11 of the Internal Revenue Code. The top federal long-term capital gains rate is 20% under Section 1(h), and the 3.8% net investment income tax under Section 1411 can apply on top of it, for a combined 23.8%.

In this example, the asset sale costs the founders $3,200,400 more in federal tax. The second layer lands at capital gains rates because Section 331 treats a liquidating distribution as payment in exchange for your stock. State taxes, deal costs, and anything the buyer pays for its tax benefit will change your real numbers, so model your own deal with a certified public accountant (CPA).

Where QSBS Fits

Section 1202 of the Internal Revenue Code lets a stockholder who is an individual (or another non-corporate taxpayer) exclude gain when selling qualifying small business stock, which must be stock in a C corporation that meets the statute’s tests. For stock acquired after July 4, 2025, the exclusion means that 50% of the capital gain on the sale of your stock is tax-free if you’ve held the stock for at least three years, 75% after four years and 100% after five years, capped per company at the greater of $15M or 10 times your basis, with a $75M gross assets limit on the company. Stock acquired on or before July 4, 2025 keeps the earlier rules: a five-year hold for the full exclusion, a cap of the greater of $10M or 10 times basis, and a $50M gross assets limit.

The exclusion applies only to taxpayers other than corporations, so it cannot reduce the 21% tax your company pays when it sells its own assets. A stock sale keeps the full benefit in play, and that alone can justify pushing back on an asset structure.

State law varies here. California does not conform to Section 1202, so a California taxpayer pays California tax on the full gain even when the federal exclusion applies.

Does an Asset Purchase Really Leave the Liabilities Behind?

Mostly, with exceptions that every seller and buyer should understand before signing.

The usual rule is that a company buying another company’s assets does not take on the seller’s liabilities. The California Supreme Court’s decision in Ray v. Alad Corp. describes the traditional exceptions, where the buyer can still be liable if:

1. 1The buyer expressly or impliedly agreed to assume the liability.
2. 2The deal is, in substance, a merger or consolidation of the companies.
3. 3The buyer is a mere continuation of the seller.
4. 4The assets were transferred to escape the seller’s debts through fraud.

The same case added a product line exception in California for a buyer that takes over and continues the seller’s product line. Successor liability is state law, and states differ on how far they follow these rules, so the risk depends on which state’s law applies.

For sellers, the bigger point is the flip side: whatever the buyer does not assume stays with your company. Your company still has to deal with its remaining debts, taxes, and claims, so plan the wind-down with your lawyer and be sure to hold back enough of the sale proceeds to cover these remaining liabilities before any sale proceeds are paid out to stockholders.

The purchase agreement should list assumed liabilities and excluded liabilities in specific terms. Pair that with an indemnification cap so a retained liability that lands on the buyer anyway does not consume your proceeds.

What Has to Be Transferred in a Software Company Asset Sale?

In a stock deal, the company keeps everything it already owns. In an asset deal, each item has to be transferred on its own, and for a SaaS company the list runs longer than most founders expect.

Stock deals are not consent-free either. A change-of-control clause can let a customer terminate or require its consent when the company is sold, so flag those clauses in diligence and line up waivers from the customers that matter.

The ownership chain for code is where buyers dig hardest, and there is more detail in this piece on managing IP risk in acquisitions. If your team is part of the value, plan for keeping key employees after closing as carefully as you plan the transfer list.

Can You Get Stock-Sale Legal Treatment With Asset-Sale Tax Treatment?

Sometimes. Two tax elections let a deal close as a stock sale for legal purposes while being taxed as an asset sale.

• ●Section 338(h)(10) election. A joint election the buyer and seller make on Form 8023. The buyer must be a corporation that acquires at least 80% of the target’s stock in a qualified stock purchase, and the target must be an S corporation or a member of a selling corporate group. The election is due by the 15th day of the ninth month after the month the acquisition closes, and it is irrevocable.
• ●Section 336(e) election. A similar result is available when the seller is a domestic corporation or the target is an S corporation whose shareholders sell, and the buyer does not have to be a corporation.

Here is the catch for venture-backed founders. A typical startup is a standalone C corporation owned by founders, employees, and venture funds, so it is neither an S corporation nor a subsidiary, and neither election fits. Under Section 1361, an S corporation can have only one class of stock and generally cannot have entity shareholders such as venture funds, which rules it out once you raise a priced round.

If you are an S corporation, these elections can split the difference, though the deemed asset sale can raise your own tax bill, so run the numbers both ways. Where no election fits, the real lever is price: the step-up is worth money to the buyer, and you can ask for a higher purchase price (a “gross-up”) to cover the extra tax an asset structure costs you.

How Does Your Entity Type Change the Answer?

The same deal can produce very different tax results depending on how your company is taxed today.

The liability rule stays the same across all three. Selling the ownership interests leaves the entity’s liabilities inside it, while an asset sale leaves the unassumed ones with the seller.

QSBS is available only for C corporation stock. If you still run an LLC and expect to raise or sell, the timing of converting your LLC to a Delaware C-Corp matters, because the QSBS holding period generally starts on the date you receive the stock.

Why Do Many Venture-Backed Startups Sell Through a Merger?

A stock purchase needs every stockholder to sign the stock purchase agreement and sell—and some may be forced to sell if the majority stockholders have “drag-along rights.” With angel investors, venture funds, and employees who exercised options on your cap table, collecting every signature is often impractical.

Many venture-backed deals close as a reverse triangular merger instead. The buyer forms a subsidiary that merges into your company, your company survives as the buyer’s wholly owned subsidiary, and your stockholders receive the deal consideration for their shares.

Under Section 251 of the Delaware General Corporation Law (DGCL), the board approves the merger agreement, and the stockholders adopt it when a majority of the outstanding stock entitled to vote approves. Section 271 of the DGCL requires the same majority of outstanding voting stock to approve a sale of all or substantially all of a company’s assets.

For liability and contracts, a reverse triangular merger behaves much like a stock sale, since the same legal entity survives. Your certificate of incorporation and investor agreements can add separate preferred stock votes and drag-along rights that require other holders to vote in favor, so read those documents before you agree on a structure.

How Do You Negotiate the Structure Before You Sign the LOI?

In my experience, once you sign the LOI, the deal is about 90% done, so the structure discussion belongs before signature. Work through these steps in order.

Model Your After-Tax Number Both Ways

Run the asset and stock scenarios with your CPA using your real basis, your state of residence, and your QSBS status. If you do not have a CPA or tax advisor, I’m happy to introduce you to one.

Write the Structure Into the LOI

An LOI that leaves structure “to be determined” lets the buyer propose an asset deal after you have stopped talking to other bidders. Name the structure, the purchase price, and who bears the tax cost of any election.

Price the Buyer’s Tax Benefit

If the buyer insists on an asset deal or a deemed asset sale election, ask for a gross-up that covers your extra tax. The step-up is worth real deductions to the buyer over 15 years of amortization, so you are asking them to share value they actually receive.

Map the Consents Early

Pull every customer, vendor, and license agreement and flag the anti-assignment and change-of-control clauses. Start consent conversations as soon as the deal is signed, so one slow customer does not push back your closing date.

Lock Down the Liability Split

Define assumed and excluded liabilities precisely, cap your indemnification exposure, keep the escrow limited in amount and time, and finish your disclosure schedules thoroughly. If a broker or banker sends you their own template forms, have a deal lawyer review those forms before you sign them; that review is a core part of the acquisition deal support I provide.

Frequently Asked Questions

Here are short answers to the deal-structure questions founders ask me most.

Choose the Structure Before the Buyer Does

The asset purchase vs. stock purchase decision looks like paperwork, yet it can move more money than any other term in your deal. Buyers usually want assets for the step-up and liability control; sellers usually want stock for one level of tax, QSBS, and a clean exit.

The structure gets set in the LOI, so decide what you need before you sign it and price anything you give up. Go out there and build something great.