What is an asset sale?

(FSB Magazine) -- Dear FSB: I own a consulting business in the apparel industry and am planning to buy a deli. I've read that it's in my interest for the transaction to be an asset sale rather than a stock sale. How are they different?--Rick Brams North Brunswick, N.J.

Dear Rick: If a business has been set up as a corporation, the owner may want to sell you all of the shares of the business. That is called a stock sale. Sellers like this type of deal because their profits get taxed at the capital-gains rate rather than the income-tax rate, which is often considerably higher.

You probably will want to avoid buying the business that way. Let's say you buy 100 percent of the shares of the deli in a stock sale. Although it's a private company, the tax consequences would be the same as if you bought stock in, say, Google (Charts, Fortune 500): You'd get no tax write-off for purchasing them.

"Stock sales are very rare, because buyers don't like them," says Douglas Stives, a CPA and senior tax partner with the Curchin Group (curchin.com) in Red Bank, N.J., who often advises buyers and sellers of small businesses.

If you bought only the assets of the business - the refrigerators, the tables and chairs and the salami inventory - you could depreciate most of them over five or ten years and eventually recoup most or all of your purchase price. You can't do that with a stock sale.

An asset sale also frees you from any liabilities the previous owner may have incurred. Unpaid sales taxes or late payroll taxes aren't unusual in a cash business. In a stock sale, you'd become the owner of the corporation and would be on the hook for those obligations.

Have you bought a business as an asset sale? Have you sold a business in a stock sale? What did you find are the upsides and the downsides? Post your thoughts on the FSB blog.