Asset Purchase Versus Equity Purchase: How the Structure Decision Affects Risk, Taxes, and Successor Liability

By Hank FasthoffJuly 6, 2026

Before a single provision of the purchase agreement is negotiated, the buyer and seller must answer a threshold question that affects every aspect of the transaction. Is the buyer acquiring the company's assets, or is the buyer acquiring the ownership interests (stock, membership interests, or partnership interests) of the entity that owns them? Everything downstream, including what liabilities transfer, how the purchase price is taxed, whether contracts require consent to assign, and what the buyer's post-closing exposure looks like, flows from this structural decision.

Buyers prefer asset purchases. Sellers prefer equity purchases. Understanding why, and knowing when the other side's preference is worth accommodating, is the starting point for every M&A negotiation.

What an Asset Purchase Looks Like

In an asset purchase, the buyer acquires specific things from the company rather than the company itself. Equipment, inventory, intellectual property, customer contracts, real property, accounts receivable, goodwill, and whatever other assets the parties identify in the purchase agreement transfer to the buyer. Everything else, including liabilities the buyer didn't agree to assume, remains with the seller's entity.

An asset purchase agreement includes a schedule of purchased assets (everything the buyer is acquiring) and a schedule of assumed liabilities (the specific obligations the buyer is taking on). Anything not on those schedules doesn't transfer. If a product liability claim from three years ago isn't on the assumed liabilities schedule, it remains with the seller.

Asset purchases require individual transfers for each asset. Real property transfers by deed. Vehicles transfer by title. Intellectual property transfers by assignment. Contracts transfer by assignment (and many contracts require the other party's consent before assignment). Permits and licenses may or may not be transferable. Each transfer is a separate transaction, which makes asset purchases more complex to execute than equity purchases, particularly when the business has hundreds of contracts, multiple properties, and specialized licenses.

What an Equity Purchase Looks Like

In an equity purchase (also called a stock purchase for corporations or a membership interest purchase for LLCs), the buyer acquires the ownership interests of the entity itself. When the buyer acquires 100 percent of the entity's stock or membership interests, the buyer now owns the entity, and the entity continues to own everything it owned before. Nothing transfers. No deeds, no assignments, no individual conveyances. The entity is the same legal person it was yesterday, with the same assets, the same contracts, the same employees, and the same liabilities. Only the ownership has changed.

From a transfer mechanics standpoint, equity purchases are simpler. One assignment of stock or membership interests, and the buyer owns the whole company. Contracts don't need to be assigned because the contracting party (the entity) hasn't changed. Employees don't need to be terminated and rehired because their employer (the entity) is the same. Permits and licenses issued to the entity typically survive because the entity continues to exist.

But that simplicity comes with a significant cost. Because nothing transfers out of the entity, nothing gets left behind either. Every liability the entity has, known and unknown, disclosed and undisclosed, comes with the purchase. Pending litigation, tax deficiencies, environmental contamination, employee claims, product liability exposure, and contractual obligations the buyer never saw during due diligence are all inside the entity the buyer just acquired.

Successor Liability

Successor liability is the risk that the buyer becomes responsible for the seller's pre-closing obligations. In an equity purchase, successor liability is a certainty. Because the buyer acquired the entity, and the entity's liabilities didn't go anywhere, the buyer inherits every obligation the entity has, regardless of whether the buyer knew about it.

In an asset purchase, the general rule is that the buyer isn't responsible for the seller's liabilities unless the buyer agreed to assume them. Only the liabilities listed on the assumed liabilities schedule transfer. Everything else, including claims the seller didn't disclose and obligations the seller didn't know about, remains with the seller's entity.

Courts in many states have carved out exceptions to this general rule through four common-law doctrines. Successor liability may be imposed on an asset buyer if the buyer agreed (through express language or by implication) to assume the seller's liabilities. Successor liability may be imposed if the transaction amounts to a de facto merger or consolidation (meaning the substance of the deal is a merger even though it's structured as an asset sale). Successor liability may be imposed if the buyer is a "mere continuation" of the seller (same management, same location, same operations, same owners). And successor liability may be imposed if the transaction was structured to defraud the seller's creditors.

Texas has taken a more buyer-friendly approach than most states. Under Texas Business Organizations Code § 10.251(a), Texas has eliminated the de facto merger and mere continuation exceptions. In Texas, an asset buyer is liable for the seller's pre-closing obligations only if the buyer agreed to assume them or if the transaction was a fraudulent conveyance. Courts won't look past the structure of an asset purchase to impose successor liability based on continuity of operations, management, or ownership, which they do in states like New York, New Jersey, and Massachusetts. For buyers acquiring Texas businesses through asset purchases, this statutory protection is a meaningful advantage that reduces post-closing liability exposure.

Even in Texas, though, asset purchases don't eliminate all successor liability risk. Certain liabilities attach to the assets themselves regardless of the purchase structure. Tax liens, environmental contamination liability (under CERCLA, the current owner of contaminated property can be liable regardless of when the contamination occurred), and certain employee benefit obligations may follow the assets to the buyer. Due diligence must identify these asset-level liabilities even though the general rule protects the buyer from entity-level claims.

Tax Treatment

Tax treatment is where buyers and sellers disagree most sharply, and it's often the reason the structure negotiation is difficult.

In an asset purchase, the buyer receives a "stepped-up basis" in the acquired assets. The buyer's tax basis in each asset equals the portion of the purchase price allocated to that asset, which is its current fair market value. For depreciable and amortizable assets, a stepped-up basis means higher depreciation and amortization deductions in the years following the acquisition, which reduces the buyer's taxable income and produces real cash savings.

In an equity purchase, the buyer inherits the entity's existing ("carryover") basis in its assets. If the entity purchased equipment for $500,000 ten years ago and has depreciated it down to $50,000, the buyer's basis in that equipment is $50,000, not the fair market value the buyer paid for the company. There's no step-up, no new depreciation deductions, and no corresponding tax savings.

For sellers, the picture is reversed. In an equity purchase, the seller typically recognizes capital gain on the sale of its ownership interests, which is taxed at capital gains rates (currently 20 percent for federal, plus the 3.8 percent net investment income tax). In an asset purchase, the gain is allocated across the individual assets, and some of that gain may be taxed as ordinary income rather than capital gain. Depreciation recapture under IRC §§ 1245 and 1250 requires the seller to pay ordinary income rates on the portion of the gain attributable to previously taken depreciation deductions. The result is a higher effective tax rate for the seller in an asset sale.

This misalignment, where the buyer's preferred structure produces a tax benefit for the buyer and a tax cost for the seller, is often resolved through purchase price adjustment. If the seller agrees to an asset structure that costs the seller an additional $200,000 in taxes, the buyer may agree to increase the purchase price by some portion of that amount to compensate.

Purchase Price Allocation Under IRC § 1060

In an asset purchase, the purchase price must be allocated among the acquired assets under the residual method prescribed by IRC § 1060. The allocation determines the buyer's depreciable and amortizable basis in each asset and the seller's gain or loss on each asset.

Assets are classified into seven categories (Class I through Class VII), and the purchase price is allocated to each class in order. Cash and equivalents (Class I) are allocated first at face value. Then actively traded securities (Class II), accounts receivable and similar assets (Class III), inventory (Class IV), tangible personal property and real property (Class V), intangible assets other than goodwill (Class VI, including patents, customer relationships, trade names, and non-compete agreements), and finally goodwill and going concern value (Class VII).

Intangible assets in Classes VI and VII, including goodwill, are amortizable over 15 years under IRC § 197. Tangible assets in Class V are depreciable over their applicable recovery periods under MACRS. Allocating more of the purchase price to shorter-lived depreciable assets produces faster tax deductions for the buyer. Allocating more to goodwill produces slower deductions (15-year amortization). Buyers and sellers have opposing interests in the allocation, and the purchase agreement should include an agreed allocation or a mechanism for resolving allocation disputes.

Both parties must report the allocation consistently on their tax returns (IRS Form 8594 for asset acquisitions). If the buyer and seller report different allocations, both face audit risk.

The Section 338(h)(10) Election

When the buyer wants the tax benefits of an asset purchase but the seller wants the transfer simplicity of an equity purchase, a § 338(h)(10) election can bridge the difference.

Under IRC § 338(h)(10), if the buyer makes a qualified stock purchase (acquiring at least 80 percent of the target's voting power and value) of an S corporation or a subsidiary of a consolidated group, the parties can jointly elect to treat the transaction as an asset purchase for federal income tax purposes while maintaining the legal form of a stock purchase. The buyer receives a stepped-up basis in the target's assets. The seller recognizes gain as if it sold assets (not stock), which may produce ordinary income on depreciation recapture.

For legal purposes, the transaction remains a stock purchase. No individual asset transfers, no contract assignments, no employee terminations. But for tax purposes, it's treated as if the target sold all its assets at fair market value and then liquidated. The buyer gets the tax benefits of an asset deal, while the seller gets the transfer simplicity of an equity deal. The trade-off is that the seller's tax bill may be higher than in a straight equity sale, and the buyer typically compensates the seller for that difference through a purchase price adjustment.

A § 338(h)(10) election is available only for S corporations and subsidiaries of consolidated groups. It isn't available for C corporations (where a § 338(g) election exists but produces double taxation), partnerships, or LLCs taxed as partnerships (which already receive pass-through treatment in an asset sale). Verify the target's entity type and tax status early in diligence before building the election into your financial model.

Contract Assignment and Consent

One of the most significant practical differences between asset and equity purchases is how contracts are transferred.

In an equity purchase, the entity that signed the contracts hasn't changed. Only its ownership has changed. Most contracts survive the change of ownership without requiring consent from the other party. However, many commercial contracts contain change-of-control provisions that give the other party the right to terminate, renegotiate, or refuse to perform if the entity's ownership changes. Identifying and managing change-of-control triggers during due diligence is essential in an equity purchase.

In an asset purchase, contracts must be assigned from the seller's entity to the buyer. Many contracts contain anti-assignment provisions that prohibit assignment without the other party's consent. If a key customer contract requires consent to assign and the customer refuses, the buyer may not be able to acquire the contract, which can undermine the value of the acquisition. Obtaining third-party consents is one of the most time-consuming and uncertain elements of an asset purchase, and the purchase agreement should address what happens if consents can't be obtained before closing (the seller may agree to use commercially reasonable efforts to obtain consents, or to continue performing the contract for the buyer's benefit until consent is obtained or the contract expires).

When Each Structure Is Appropriate

Asset purchases are generally appropriate when the buyer wants to select specific assets and leave behind unwanted liabilities, the target has significant known or suspected liabilities (pending litigation, environmental exposure, tax deficiencies), the buyer wants a stepped-up basis in the acquired assets for depreciation and amortization, most contracts are assignable or can be replaced, and the target isn't a C corporation (where double taxation on an asset sale makes the structure prohibitively expensive for the seller).

Equity purchases are generally appropriate when the target has contracts, permits, or licenses that are difficult or impossible to assign, the buyer and seller want a simpler closing with fewer individual transfers, the target is a C corporation and the seller wants to avoid double taxation, the target's liabilities have been thoroughly diligenced and are manageable, and the parties can resolve the buyer's carryover basis concern through a § 338(h)(10) election (if eligible) or through purchase price adjustment.

Practical Recommendations

Model the tax consequences of both structures before negotiating structure with the other side. The difference in after-tax proceeds to the seller and after-tax cost to the buyer may be significant, and understanding those numbers puts you in a stronger position when negotiating purchase price.

If the target is an S corporation, evaluate a § 338(h)(10) election early. It can resolve the asset-versus-equity standoff by giving the buyer a stepped-up basis and the seller simpler transfer mechanics, with the purchase price adjusted to account for the seller's additional tax cost.

In an asset purchase, draft the purchased assets and assumed liabilities schedules with precision. Ambiguous language like "all liabilities arising in the ordinary course" invites broad interpretation. List specific assets and specific assumed liabilities, and state that everything not listed is excluded or retained.

In an equity purchase, conduct thorough due diligence on the target's liabilities, including litigation, tax, environmental, employment, and regulatory exposure. Every undiscovered liability is the buyer's problem after closing, and the purchase agreement's representations, warranties, and indemnification provisions are the buyer's primary contractual protection.

In Texas, structure asset purchases with confidence that the buyer won't face de facto merger or mere continuation claims, but don't ignore asset-level liabilities (tax liens, environmental contamination, employee benefit obligations) that transfer regardless of the deal structure.

Regardless of structure, address purchase price allocation in the purchase agreement. An agreed allocation prevents post-closing disputes and ensures both parties report consistently to the IRS.