When I buy a business, am I responsible for its liabilities too?

The best way to answer that question is to start with a basic understanding of the difference between an asset purchase and a stock purchase.

In an asset purchase, the buyer is usually acquiring the assets of the business they are buying – not the liabilities (with some exceptions) and not the entire business itself. Generally speaking, in a stock purchase, the buyer purchases the entire business entity, including all the assets and all the liabilities.

The assets might include, for example, equipment, furniture, fixtures, contracts, customer accounts, accounts receivable, inventory, the entity name, a commercial lease or lease options, website and marketing platforms, and the like.  A liability may, for example, be a UCC lien on the fixtures of the business. When closing an asset purchase, all the assets being acquired by the buyer of the business are transferred to the new buyer entity at the time of closing.  The remaining assets – and the liabilities – that the buyer did not acquire as part of the transaction still belong to the seller entity.  When closing a stock purchase, the ownership of the entire business entity itself is transferred to the buyer (and the business entity continues to own the same assets and have the same liabilities).  It is critical for the parties to spell these details out very clearly in the Asset Purchase Agreement (which is a topic I will cover another day).

The distinction between an asset purchase and a stock purchase affects the structure of the transaction in several ways, and there are pros and cons to each including tax considerations and other business-related consequences for both parties.  It should go without saying, then, that both parties would greatly benefit from the guidance of an experienced business attorney.