Stock Purchase
A transaction structure in which the buyer acquires the equity (shares of a corporation, membership interests of an LLC, or partnership interests) of the target entity from the target's owners. The target continues as a going concern under new ownership.
A stock purchase is a transaction structure in which the buyer acquires the equity (shares of a corporation, membership interests of an LLC, or partnership interests) of the target entity from the target's owners. The target entity continues to exist as a going concern under new ownership; all of the target's assets, liabilities, contracts, and licenses remain with the entity by operation of law.
Continuity of liabilities
In a stock purchase, the target entity carries forward all of its pre-closing liabilities, known and unknown, contingent and fixed, by operation of law. The buyer's exposure is theoretically capped at its investment in the target (limited liability), but the target's value is reduced by every retained liability. Indemnification provisions in the stock purchase agreement are the primary mechanism for shifting pre-closing liability risk back to the seller.
Continuity of contracts and licenses
Because the target entity continues to exist, contracts, leases, licenses, and permits typically continue without need for assignment or third-party consent, except where contracts contain specific change-of-control provisions triggered by the equity transfer.
Tax treatment
A stock purchase generally does not produce a tax basis step-up in the target's assets for the buyer (with limited exceptions under IRC § 338(h)(10) elections for S corporations and certain subsidiary purchases). This contrasts with asset purchases, which generally produce a basis step-up, a meaningful tax difference.
Stock purchases are favored where the target's value is heavily concentrated in assignment-restricted contracts (government contracts, intellectual property licenses, regulatory licenses) and where the seller's tax position favors equity-level capital gains over asset-level ordinary income on certain categories.