How to Structure a Deal That Is a Stock Purchase for Legal Purposes and an Asset Purchase for Tax Purposes — Is the “Best of Both Worlds” Possible?
When business owners, founders, or private equity sponsors talk about selling a company, one of the biggest sticking points isn’t just price — it’s how the deal is structured. On the surface, there are two basic ways to sell a business:
Stock sale: the buyer purchases the ownership interests (shares or membership units) of the company.
Asset sale: the buyer purchases individual assets and liabilities of the business.
Each approach has very different legal and tax consequences.
Why Buyers Often Want an Asset-Like Tax Result
Buyers typically prefer the economics of an asset purchase. When a buyer gets a step-up in tax basis for the assets they acquire, they can depreciate or amortize those assets based on the price they paid — reducing future taxable income and improving post-closing cash flow. This is especially appealing for private equity sponsors and strategic buyers who are focused on maximizing returns.
But asset purchases are messy. They often require:
assignment of contracts, leases, and licenses,
re-hiring employees or transferring employment agreements,
negotiating consents with third parties,
and dealing with potential transfer taxes.
For sellers, these complications — plus the tax outcome — can be painful.
Why Sellers Prefer a Stock Sale
From a seller’s perspective, stock sales are cleaner:
the legal entity stays the same,
contracts, permits, and licenses transfer with the company,
shareholders often qualify for favorable capital gains treatment,
and in pass-through entities (like S corporations or LLCs), long-term capital gains tax rates generally apply rather than ordinary income rates.
However, stock sales historically *don’t give the buyer the stepped-up basis *they want for tax purposes, unless a special election is made.
This is where smart deal structuring can create a bridge between buyer and seller interests.
The 338(h)(10) Election — A Tax Bridge Under the Hood
A Section 338(h)(10) election allows the parties to treat a stock purchase — for federal income tax purposes — as if the corporation sold its assets in an asset sale. Legally, it’s still a stock sale — so contracts, licenses, and continuity remain intact — but for tax purposes, assets are deemed sold at fair market value, giving the buyer the stepped-up basis they want.
Key features of a 338(h)(10) election:
It bridges the gap between the buyer’s desire for asset purchase tax treatment and the seller’s preference for a stock sale.
It requires the buyer to be a corporation and to purchase at least 80% of the target’s stock.
It must generally be agreed to by both buyer and seller — all shareholders in an S corporation must join the election.
It provides the buyer with accelerated depreciation and amortization options after closing.
For the seller, being taxed as if the underlying assets were sold may increase the tax burden, which often leads sellers to negotiate higher purchase prices or gross-ups as part of the deal.
While attractive in theory, 338(h)(10) elections have limitations:
they are strictly transactional and must align with IRS eligibility rules,
they depend on the validity of the target’s S corporation status,
and they must be elected jointly.
This can make them hard to use in real private equity scenarios — where buyers frequently use LLCs or partnerships and sellers want rollover equity (i.e., sellers reinvesting some of their proceeds into the new entity).
F-Reorganization — A More Flexible Alternative
An alternative that has grown in popularity — especially in private equity deals — is an F-Reorganization under Section 368(a)(1)(F) of the Internal Revenue Code. An F-Reorganization allows the transaction to look like a stock purchase legally but be treated in a way that gives the buyer a step-up in the tax basis of the acquired assets — without the restrictive requirements of a 338(h)(10) election.
At a high level, an F-Reorganization typically involves:
forming a new corporation (Newco),
contributing the seller’s shares (Oldco) into Newco in exchange for Newco stock,
making a qualified subchapter S subsidiary (QSub) election for the old company,
then converting the old company into an LLC (if desired) — all before closing the acquisition.
This structure allows:
the buyer to treat the transaction as if they purchased the assets for tax purposes — obtaining a step-up in basis,
the seller to enjoy the benefits of a legal stock sale,
and the seller to potentially defer gain on rollover equity because the F-Reorganization does not tax rollovers the same way a 338(h)(10) does.
Advantages of F-Reorganization over 338(h)(10):
Flexibility on ownership and structure: No minimum 80% purchase requirement.
Rollover equity benefits: Sellers can often defer tax on rollover portions.
No dependency on maintaining S corp status: This reduces risk of losing the tax step-up if the S election was invalid.
Better alignment with private equity structures: F-Reorgs can accommodate LLC or partnership buyers more easily.Choosing the Right Structure — Not One Size Fits All
Why This Matters in Real Transactions
Deals fail when buyers and sellers walk into the room with fundamentally different expectations about risk, taxes, and ownership. Smart structuring can eliminate that friction before it becomes a deal-breaker.
From a seller’s perspective, the difference between double taxation and capital gains can be millions of dollars. From a buyer’s perspective, the ability to step up asset basis can meaningfully improve post-acquisition performance. A well-chosen structure can bridge that gap, reduce negotiation tension, and preserve value for both sides.
But these are not DIY decisions — the right path depends on entity type, buyer composition, rollover desires, and the specific tax and legal positions of the parties involved. Getting the right advisors at the table early — legal, tax, and CFO-level strategy — changes outcomes dramatically.
This article is for educational purposes only. It is not legal, tax, or financial advice, and results may vary depending on your specific business. Always consult a qualified professional for guidance tailored to your situation.