What’s wrong with stock?

Despite not being individual human beings, corporations, as far as US law is concerned, are legal persons, and have many of the same rights and responsibilities as natural persons do. For example, a corporation can own property, and can sue or be sued. That’s right folks. Corporations can sue, OR BE SUED! Corporations have to pay taxes. With respect to certain taxes, such as payroll or sales taxes, if the corporation does not pay the tax, the taxing agency can pursue the “responsible persons” (fancy lingo for the one or more dudes or dude-ettes that had the authority to cause the corporation to pay the tax but chose to pay a different creditor instead – like the landlord [who gets real angry when she doesn’t get her rent on time!]). Believe it or not, that “choice” can lead to personal liability for the unpaid corporate payroll or sales tax. So, what does this have to do with stock.

Well, the point is like people, corporations can get into a lot of financial trouble. Now, people often want to purchase a business that is operated as a corporation. As a general rule, such people have two choices in how to “structure” the purchase: Either as a purchase of the corporation’s stock or as a purchase of the corporation’s assets. So, what’s the difference? Well there are many differences. First, such decisions are often driven by two basic factors: (1) the tax and (2) the non-tax factors. The objective of the tax factor is typically how the parties can minimize any adverse tax consequences of the transaction. The “non-tax” factors are all the other factors and considerations that are not tax factors. One of the key “non-tax” factors is that usually the buyer does not want to acquire the LIABILITIES of the corporation being purchased (e. g., see above paragraph). Now, when you purchase the STOCK of a corporation, by operation of law, you acquire all of the assets AND ALL OF THE LIABILITIES of the corporation being purchased. So, in this respect, that is what is wrong with stock. When you acquire from the selling shareholders all of their stock (thereby becoming the new owner of the corporation) in the process you acquire of all that corporation’s liabilities. In contrast, if you purchase the ASSETS of the corporation, unless you specifically agree to assume the liabilities of the corporation being purchased, as a general rule, you do not acquire the liabilities of the corporation being purchased.

Now there a number of reasons why the purchasers may want to purchase the stock (and sometimes they may have no choice). But that is the subject for a future article.