Indiana Business Law Blog
Buying a small 
business in Indiana is an exciting venture that can set you on the path to success. One critical decision stands between you and your dream: Should you buy the company itself or just its assets? Let’s explore these two approaches to help you navigate this important choice. For simplicity, let’s assume the business is organized as an Indiana limited liability company (LLC).
Stock Purchase vs. Asset Purchase: The Basics
If you decide to buy the company itself, you’ll be purchasing the interest in the LLC—often referred to as a “stock sale.” While LLCs don’t technically have stock, the term persists as a carryover from the days when corporations, which do have stock, dominated the business landscape. Another name that is becoming more common is “equity sale,” which covers stock in a corporation, interest in an LLC, and any other form of equity.
Alternatively, you could purchase the assets owned by the seller’s LLC—such as real estate, equipment, inventory, intellectual property, and contracts—without acquiring the LLC itself. This is known as an “asset purchase.” Buyers generally form a new LLC to hold the purchased assets.
Each option has distinct pros and cons, influenced by factors like liability, complexity, and cost. While the buyer’s concerns often play a larger role in determining the structure, it’s important to consider both sides.
Hidden Liability
Stock purchases are generally riskier for buyers because they inherit the company’s obligations, including unknown liabilities. To mitigate risk, the buyer can:
- Conduct a due diligence investigation, including an examination of financial records, contracts, compliance history, and potential legal issues.
- Negotiate an indemnification agreement, where the seller agrees to reimburse the buyer for certain losses.
- Assess the seller’s financial capacity to meet indemnification obligations.
Although these measures can reduce the buyer’s risk, no investigation or agreement can eliminate risk entirely.
Simplicity vs. Complexity
A stock purchase agreement is usually simpler than an asset purchase agreement, and a stock purchase typically requires fewer steps. If you choose to buy only the assets, your new LLC may need to:
- Hire employees who will continue working for the business.
- Set up new employee benefits programs like 401(k) plans.
- Build supplier relationships and negotiate new contracts.
- Sign new leases if the business operates in rented facilities.
By contrast, buying the company itself can streamline, or even eliminate, these tasks, as existing relationships, contracts, and benefits often remain intact.
Transaction Costs
Legal and accounting fees often comprise the bulk of transaction costs. A stock purchase is typically more cost-effective, as it involves a simpler purchase agreement and fewer additional arrangements than an asset purchase.
Tax Considerations for Stock vs. Asset Purchases
Tax consequences often dictate whether a stock purchase or an asset purchase is more beneficial. Our business attorneys collaborate with accountants and tax advisors to help you make the best choice for your situation, balancing tax implications with other key factors.
Both buyers and sellers of small businesses are well-advised to involve experienced legal professionals early in the process. Don’t let legal uncertainties derail your business purchase. Contact Harshman Ponist today to safeguard your investment with trusted legal guidance.