When a Maryland business owner decides to sell, the immediate focus tends to fall on valuation: what is the business worth, and how much will the buyer pay? That is understandable. But experienced business transaction attorneys and their clients know that the structure of the deal can be just as important as the headline price. Two deals with identical purchase prices can produce wildly different after-tax outcomes depending on whether the transaction is structured as an asset sale or a stock sale.

A Maryland business owner who accepts a $3 million offer structured as an asset deal may net significantly less after taxes than one who closes a $2.75 million stock deal, depending on the composition of the business’s assets, the amount of depreciation previously claimed, the entity type, and whether Maryland real property is involved. The difference is not trivial. On a typical small-to-mid-size business transaction, the structure can shift the tax burden by tens or even hundreds of thousands of dollars.

The challenge is that deal structure is almost always decided early, often in the letter of intent. By the time most sellers engage counsel in earnest, the structural framework has already been accepted in principle. Renegotiating structure after a letter of intent is signed is possible but uncommon, and it introduces friction that can damage or kill the transaction. The time to understand and negotiate structure is before you sign anything.

This guide explains the legal and tax differences between an asset sale and a stock sale, how Maryland law and Maryland taxes interact with the federal analysis, and what Maryland business owners need to understand before they enter any acquisition negotiation.

In an asset sale, the buyer does not purchase the business entity itself. Instead, the buyer acquires a specified package of assets from the selling entity. Those assets can include tangible property (equipment, inventory, vehicles, furniture, real estate), intangible property (goodwill, trade names, customer lists, intellectual property, non-compete agreements), and contract rights (customer contracts, leases, vendor agreements). The seller’s entity continues to exist after the closing; it simply holds whatever was not sold, plus the sale proceeds.

A key feature of an asset sale is that the buyer and seller negotiate which liabilities, if any, the buyer will assume. The buyer can agree to assume certain specified liabilities (such as a commercial lease or an equipment loan) while expressly excluding others. This selectivity is one of the primary reasons buyers prefer asset deals. The buyer is not automatically stepping into the seller’s legal shoes and inheriting everything that comes with them.

After closing, the selling entity distributes the proceeds to its owners (subject to applicable taxes) and typically winds down or continues operating in a different capacity. The legal structure of the post-closing entity and its dissolution or continuation is governed by the Maryland Corporations and Associations Article.

In a stock sale, the buyer acquires the seller’s ownership interest in the business entity: shares of stock in a corporation, or membership interests in a limited liability company. The entity itself does not change; its identity, contracts, liabilities, relationships, licenses, and history all continue uninterrupted. The only thing that changes is who owns the entity.

This is why stock sales are legally simpler in many respects. Contracts, leases, and licenses generally do not need to be separately assigned (though change of control provisions in those contracts may still require third-party consents). Employees remain employees of the same employer. The business’s tax identification number, bank accounts, and government registrations continue unchanged.

Because the entity itself transfers, however, the buyer inherits everything the entity carries, including liabilities that are known, disclosed, undisclosed, and contingent. That is the fundamental tradeoff: simplicity and continuity for the buyer, but also full exposure to whatever liability history the entity carries.

For LLCs, the transaction involves the sale of membership interests rather than stock, but the structural analysis is essentially the same as for a stock sale. The buyer acquires the ownership interest in the entity, not the individual underlying assets.

A stock sale is generally the most tax-favorable structure for an individual seller. When a shareholder sells stock or an LLC member sells membership interests held for more than one year, the gain is treated as long-term capital gain. For federal income tax purposes, long-term capital gains are taxed at preferential rates of 0%, 15%, or 20% depending on the seller’s taxable income, compared to ordinary income tax rates that can reach 37%.

High-income sellers may also owe the Net Investment Income Tax (NIIT) of 3.8% under IRC § 1411 on the gain. This applies to individuals with modified adjusted gross income exceeding $200,000 (single filers) or $250,000 (married filing jointly). Even accounting for NIIT, the maximum combined federal rate on long-term capital gains for most sellers is 23.8%, compared to a maximum marginal ordinary income rate of 37%.

At the Maryland level, capital gains are taxed as ordinary income. Maryland does not offer preferential capital gains rates. The Maryland state income tax rate peaks at 5.75%, and county and city income taxes add further on top of that. For a Frederick County business owner, the combined state and county rate is approximately 8.71% (5.75% state + 2.96% Frederick County). For a Montgomery County seller, the combined rate is approximately 8.95% (5.75% + 3.2%). These rates apply to capital gains just as to ordinary income at the Maryland level.

Asset sale taxation for sellers is considerably more complex, because different classes of assets are taxed differently. The headline gain on a well-run business may look like a capital gain, but a substantial portion of that gain can be recharacterized as ordinary income through the depreciation recapture rules.

IRC § 1245 requires that gain on the sale of depreciable personal property (equipment, machinery, vehicles, furniture, fixtures, and other tangible personal property) be treated as ordinary income to the extent of depreciation previously claimed. If the seller bought a piece of equipment for $100,000, depreciated it down to a $20,000 adjusted basis, and sells it for $80,000, the entire $60,000 gain is ordinary income under § 1245, not capital gain.

IRC § 1250 applies a similar but more limited recapture rule to depreciable real property. For most real property placed in service after 1986, depreciation is taken on a straight-line basis, so § 1250 recapture is limited. However, unrecaptured § 1250 gain (the portion of gain representing straight-line depreciation on real property) is taxed at a maximum federal rate of 25%, which is still higher than the general long-term capital gains rate for many sellers.

Sellers who have used bonus depreciation or Section 179 expensing under IRC § 168 and § 179 are particularly exposed to recapture. Accelerated depreciation reduces the asset’s basis quickly, which means a larger portion of the sale proceeds is subject to recapture as ordinary income. This is not a hypothetical concern. Many Maryland small business owners have aggressively depreciated equipment and other assets over the years, and they face a significant recapture bill when they sell.

The tax liability profile in an asset sale is also affected by the composition of the selling business. Gains on the sale of goodwill and going-concern value are generally treated as capital gain. Gains on the sale of accounts receivable are ordinary income. Gains on the sale of inventory are ordinary income. Whether the aggregate tax result in an asset sale is better or worse than a stock sale depends on the specific mix of assets, the seller’s depreciation history, and the amount allocated to goodwill versus hard assets in the purchase price allocation.

From a buyer’s perspective, the primary tax advantage of an asset purchase is the ability to take a cost basis in all acquired assets equal to the purchase price allocation. This is sometimes called a “step-up in basis,” because the buyer’s basis in the assets is stepped up from whatever the seller’s historical basis was to the actual purchase price. The stepped-up basis directly determines how much depreciation and amortization the buyer can claim on the acquired assets going forward.

Under IRC § 197, goodwill and other qualifying intangibles acquired in an asset purchase can be amortized over 15 years on a straight-line basis. For a transaction in which $1 million of the purchase price is allocated to goodwill, the buyer gets approximately $66,667 per year in deductions for 15 years. On a deal with $3 million allocated to goodwill, that is $200,000 per year in amortization deductions for 15 years. Those deductions have real economic value, particularly for buyers who are profitable and subject to high marginal tax rates.

Tangible personal property acquired in an asset purchase can also be depreciated from the buyer’s cost basis. Under current law (subject to legislative changes affecting bonus depreciation provisions), buyers may be entitled to accelerated depreciation on qualified property, generating further near-term tax benefits.

In a stock purchase, the buyer acquires the entity at its purchase price, but the entity retains its own historical tax basis in its assets unchanged. The buyer’s basis is in the stock or membership interest, not in the underlying assets. The entity’s existing depreciation schedules continue as they were, and no new depreciation is available for the difference between the historical book value of the assets and what the buyer paid for the business.

For goodwill that was self-created by the selling business, there is typically no existing basis on the books and no amortizable intangible asset. In a stock purchase, that value is effectively trapped inside the entity at zero basis. The buyer paid for it, but gets no tax benefit from it. This is the core of why buyers press hard for asset deals.

The economic magnitude of the difference can be illustrated simply. If a buyer pays $5 million for a business, with approximately $2 million representing goodwill and other intangibles, an asset purchase creates $133,333 per year in amortization deductions for 15 years. At a 30% effective tax rate, that is roughly $40,000 per year in tax savings, or $600,000 over the amortization period. That is $600,000 of real economic value the buyer forgoes in a stock deal. Most buyers price this difference directly into their offer.

Whenever a business is sold in an asset acquisition, the purchase price must be allocated among the acquired assets according to the framework established by IRC § 1060. Both the buyer and the seller must use the same allocation, and both must report it to the IRS on Form 8594 (Asset Acquisition Statement Under Section 1060), which is attached to each party’s tax return for the year of the sale.

The allocation follows a hierarchical residual method across seven asset classes, in the following order:

• Class I: Cash and cash equivalents
• Class II: Actively traded personal property (certain securities and instruments)
• Class III: Assets marked to market at least annually for federal income tax purposes
• Class IV: Inventory or property held primarily for sale to customers
• Class V: All assets not included in Classes I, II, III, IV, VI, or VII (typically equipment, furniture, fixtures, vehicles, real estate, and other tangible property)
• Class VI: Section 197 intangibles, other than goodwill and going-concern value (e.g., customer lists, trade names, non-compete covenants, licenses, patents, copyrights)
• Class VII: Goodwill and going-concern value (the residual after all other classes are satisfied)

Purchase price is allocated first to Class I assets (at face value), then to Class II, and so on down the hierarchy. Any residual consideration after all other classes are satisfied falls into Class VII (goodwill). This allocation framework is not merely a reporting requirement; it directly determines how each dollar of proceeds is taxed for the seller and what basis the buyer takes in each category of asset.

The buyer and seller often have directly opposing interests when it comes to how the purchase price is allocated. The seller generally wants as much as possible allocated to capital gain assets (goodwill, appreciated capital assets held long-term) and as little as possible to ordinary income assets (inventory, accounts receivable, recaptured personal property). The buyer generally wants as much as possible allocated to assets that generate the fastest and largest deductions, particularly Class VI and Class VII intangibles with 15-year amortization, and to shorter-lived personal property eligible for accelerated depreciation.

For example, a seller who accepts a large allocation to equipment may face significant § 1245 recapture, while the buyer benefits from depreciating that equipment from the higher stepped-up basis. Conversely, a large allocation to goodwill is generally favorable for both parties: the seller recognizes a capital gain, and the buyer gets 15 years of amortization deductions.

The allocation agreement is typically included in the asset purchase agreement, and both parties are bound to report it consistently. If the parties fail to agree on an allocation, or if one party reports an inconsistent allocation, the IRS can impose its own allocation, assert penalties, and subject both parties to examination.

One of the most commercially significant advantages of an asset sale for buyers is the ability to select which liabilities to assume. The asset purchase agreement specifies exactly which liabilities the buyer agrees to take on as assumed liabilities. All other liabilities remain with the selling entity. The seller’s entity continues to exist after the closing and remains responsible for its own pre-closing liabilities, at least as a legal matter.

This selectivity is particularly valuable when the selling business has uncertain, contingent, or disputed liabilities, such as pending litigation, environmental exposure, employment claims, warranty obligations on prior sales, tax liabilities under audit, or regulatory violations. The buyer can simply decline to assume these liabilities, leaving them with the seller’s entity.

That said, asset buyers are not always fully insulated from pre-closing liabilities. Maryland recognizes limited successor-liability exceptions that can expose an asset buyer to certain pre-closing liabilities in specific circumstances, including express or implied assumption of liabilities, de facto merger or consolidation, and the “mere continuation” exception. Maryland has not adopted the broad “product line” or “continuity of enterprise” theories as general successor-liability rules. These risks are not the default rule, but they are real enough that asset purchase agreements should address them through careful drafting, due diligence, indemnification, and, where appropriate, escrow protection.

In a stock sale, the buyer acquires the entity as it is, including its complete liability history. Known liabilities disclosed in the due diligence process are one thing. The buyer’s more significant concern is unknown and contingent liabilities that were not disclosed, did not yet arise at the time of closing, or were concealed by the seller. Tax liabilities for pre-closing periods, environmental contamination, pending or threatened litigation, breaches of pre-closing contracts, ERISA obligations, employment-related claims, and regulatory violations can all emerge after closing and bind the entity that the buyer now owns.

This is why due diligence in a stock acquisition is typically more extensive and more expensive than in an asset acquisition. The buyer is effectively conducting a forensic review of the entire corporate history. Representations, warranties, indemnification obligations, and escrow arrangements in a stock purchase agreement are designed to allocate the financial risk of these unknown pre-closing liabilities between the parties, but they do not eliminate the risk. The buyer’s ability to recover under those mechanisms depends on the seller having sufficient financial resources after the closing and the indemnification provisions being enforceable.

When a business is sold through an asset sale, each contract, lease, license, and permit that is part of the deal must be separately assigned from the selling entity to the buyer. This is a straightforward legal requirement, but it creates a practical complication: many contracts and leases include provisions that require the other party’s consent before the contract can be assigned. Without that consent, the purported assignment may be ineffective or may constitute a breach of the contract.

The consent requirement can be a significant transaction risk in certain industries. A commercial lease for a prime Maryland retail location may prohibit assignment without landlord approval. A key government contract may be non-assignable under the Federal Acquisition Regulations. A franchise agreement may require the franchisor’s approval of any transfer. Professional licenses and regulatory permits are often non-transferable at all and must be re-applied for by the buyer.

In practice, the asset purchase agreement will identify which contracts and licenses are material to the business, and the parties will need to either obtain the required consents before closing or negotiate a mechanism for addressing the failure to obtain them. A failure to obtain a critical consent before closing can allow the other contracting party to terminate the agreement after the fact, which can be catastrophic if that contract is the business’s primary revenue source.

A stock sale avoids the automatic need for contract assignment because the contracts remain with the entity. The entity does not change; only its ownership does. However, many commercial contracts include change of control provisions that give the counterparty the right to terminate or renegotiate the contract upon a change in the ownership of the contracting entity. These provisions operate independently of assignment clauses and can create the same practical consent problem in a stock deal that assignment clauses create in an asset deal.

Change of control provisions are particularly common in commercial leases, franchise agreements, government contracts, and strategic partnership agreements. Buyers and sellers in stock transactions need to conduct a careful review of all material contracts for change of control triggers as part of due diligence. An overlooked change of control provision can destabilize the business after closing just as severely as a missed assignment consent.

For Maryland businesses in franchised industries, this analysis is especially important. The franchise agreement typically controls whether a franchisee’s ownership interest can be transferred, and franchisors have broad contractual rights to approve or deny the transfer of a franchisee’s membership interests or stock. See our post on Maryland’s proposed franchise reform legislation for context on how the Maryland legislative environment is evolving for franchisee rights.

The representations and warranties that a seller makes in a purchase agreement serve as contractual assurances about the condition of what is being sold. In an asset sale, the seller’s representations are typically scoped to the specific assets being transferred: the seller owns the assets, the assets are free of liens, the assets are in the described condition, and the transferred contracts are in force. The scope is bounded by the asset schedule.

In a stock sale, the seller’s representations are necessarily broader because the buyer is acquiring the entire entity. A comprehensive stock purchase agreement will typically include representations about the entity’s entire legal, financial, tax, environmental, employment, intellectual property, and regulatory history. The seller is representing not just the condition of specific assets but the completeness and accuracy of the entity’s books and records, the absence of undisclosed liabilities, the entity’s compliance with all applicable laws, the accuracy of its financial statements, and many other matters going back years.

This scope difference is one reason stock purchase agreements tend to be longer and more heavily negotiated than asset purchase agreements for comparable businesses. The seller is making broader promises and accepting greater indemnification exposure for breaches.

Indemnification provisions in business purchase agreements require the seller to compensate the buyer for losses arising from breaches of the seller’s representations and warranties. The typical architecture includes: (1) a survival period during which claims can be made (commonly 12 to 24 months for general representations, longer for tax and fundamental representations); (2) a deductible or basket (the buyer must absorb losses up to a threshold before the seller’s indemnification obligation kicks in); and (3) a cap on the seller’s total indemnification liability (often expressed as a percentage of the purchase price).

To ensure the seller has the financial capacity to honor indemnification obligations after the closing, buyers commonly require that a portion of the purchase price be held in escrow for the duration of the survival period. The escrow amount and duration are heavily negotiated. From the seller’s perspective, a large or long escrow is economically equivalent to a price reduction, because those funds are not immediately available. From the buyer’s perspective, an inadequate escrow is a hollow remedy if the seller spends the sale proceeds before a claim arises.

These indemnification structures, when carefully drafted, are a key risk management tool in any business acquisition. Getting them right requires experienced contract negotiation and drafting counsel who understands both the commercial deal and the legal enforceability standards under Maryland law.

One of the most important tools in business acquisition tax planning is the IRC § 338(h)(10) election, which allows a qualifying stock purchase to be treated as a deemed asset sale for federal income tax purposes. When the election is properly made, the target is generally treated as having sold its assets in a taxable deemed sale and then liquidated. The result is a basis step-up for the buyer. For an S corporation target, the deemed sale gain generally flows through to the shareholders rather than producing the classic double-tax result associated with a C corporation asset sale; for a subsidiary in a consolidated group, the tax consequences are borne under the consolidated return rules.

The § 338(h)(10) election is available in two situations:

• Purchases of stock of an S corporation (the most common use in small and mid-size transactions)
• Purchases of stock of a subsidiary corporation that files a consolidated return with its corporate parent

The election is joint. The purchasing corporation and the appropriate selling party must consent, and if the target is an S corporation, all S corporation shareholders, including any who do not sell stock in the qualified stock purchase, must consent to the election. This is the key practical difference from the related § 338(g) election, which a buyer of C corporation stock can make unilaterally (but which generally results in tax at both the corporate and shareholder levels, making it rarely attractive unless the buyer is willing to absorb the full tax cost).

The election must be made by the 15th day of the ninth month after the acquisition date (effectively about 8.5 months after closing), and it is filed with the IRS on Form 8023.

When a seller agrees to a § 338(h)(10) election, the seller is effectively accepting the tax treatment of an asset sale while completing a legal stock transaction. This typically results in a higher total tax burden for the seller compared to a clean stock sale, because of the depreciation recapture and ordinary income exposure discussed above. In exchange, buyers who receive the benefit of the election typically agree to pay a higher purchase price to compensate the seller for the additional tax cost.

Quantifying the appropriate premium requires a detailed tax analysis for the specific seller, taking into account the seller’s marginal tax rate, the composition of the target’s assets, the depreciation history, the allocation of purchase price among asset classes, and the present value of the buyer’s future tax savings from the stepped-up basis. The math is not always simple, but it is always necessary. A seller who agrees to a § 338(h)(10) election without quantifying the tax cost and negotiating an adequate price adjustment may be significantly undercompensated for the tax burden they are accepting.

For C corporation sellers, an asset sale creates a significant and often deal-breaking tax problem: double taxation. When a C corporation sells its assets, the corporation recognizes gain and pays federal corporate income tax (currently 21% under IRC § 11) on that gain. The after-tax proceeds are then distributed to the shareholders either as a dividend or as a liquidating distribution. Shareholders pay tax again on those distributions as capital gains (or ordinary income for dividends from certain distributions), generating a second layer of tax on the same economic gain.

For a C corporation with $3 million in asset sale gain, the double tax analysis might look like this: the corporation pays approximately $630,000 (21%) in corporate income tax, leaving $2.37 million. When that $2.37 million is distributed to shareholders, assuming a 23.8% long-term capital gains and NIIT rate, shareholders pay approximately $564,060 in federal tax. The combined federal tax take is roughly $1.19 million, or nearly 40% of the gain. By contrast, a stock sale with the same $3 million gain would generate approximately $714,000 in federal tax at the 23.8% rate, a difference of roughly $477,000.

This is why C corporation sellers almost always insist on a stock sale, and why buyers of C corporations face an especially difficult structural negotiation. The § 338(g) election is available, but it effectively imposes full double tax on the transaction and is economically viable only if the buyer compensates the seller with a large enough premium to cover the additional tax cost, which is rare in practice.

S corporations are not subject to entity-level federal income tax (with limited exceptions including the built-in gains tax discussed above). Gains pass through directly to shareholders and are reported on their individual returns. This means that for S corporation shareholders, an asset sale results in a single level of tax on the gains, taxed at the shareholder’s individual rates. The double taxation problem that plagues C corporation sellers does not apply to S corp sellers.

This pass-through treatment significantly changes the economic analysis. An S corporation seller may find an asset sale structurally acceptable, particularly if the gains are primarily capital in nature (large goodwill allocation) and if the seller negotiates adequate compensation for any recapture exposure. The § 338(h)(10) election is available for S corporations, as noted above, and is frequently used to bridge the gap between the buyer’s desire for asset-level basis step-up and the seller’s desire for structural simplicity.

For Maryland business owners who currently operate as LLCs or sole proprietors and are considering how to optimize their entity structure before a future sale, the S corp election question is directly relevant. See our post on whether your Maryland LLC should elect S corp status in 2026 for a detailed analysis of the tax mechanics and eligibility requirements.

LLCs are flexible entities whose tax treatment depends on how they are classified for federal income tax purposes. A single-member LLC is treated as a disregarded entity by default (taxed like a sole proprietorship). A multi-member LLC is treated as a partnership by default. Either type can elect to be taxed as a C corporation or, if eligible, as an S corporation by filing the appropriate elections with the IRS.

For deal structure purposes, the tax classification of the LLC drives the analysis:

• An LLC taxed as a disregarded entity or partnership has no separate entity-level tax. A sale of membership interests is generally taxed like a partnership interest sale, with look-through rules under IRC § 751 that recharacterize a portion of the gain as ordinary income for “hot assets” (unrealized receivables and inventory). The IRC § 338 elections are not available for pass-through entities other than those treated as S corporations.
• An LLC taxed as an S corporation is subject to the S corporation analysis above, including eligibility for the § 338(h)(10) election.
• An LLC taxed as a C corporation is subject to the full double taxation analysis.

For LLC sellers in the default partnership tax classification, the gain on a membership interest sale is generally treated as a capital gain, but the look-through rules of § 751 require the seller to recognize ordinary income to the extent of the LLC’s “hot assets.” This is functionally similar to the recapture exposure in an asset sale and must be carefully analyzed before accepting any deal structure.

For a deeper comparison of LLC and corporate tax structures in Maryland, see our post on LLC vs. Corporation: Tax Implications in 2026.

When a business asset sale includes the transfer of Maryland real property, the transaction triggers both the Maryland state transfer tax and county recordation taxes. These costs can be meaningful for businesses with significant real estate holdings, and they create a real economic distinction between asset deals and equity deals that involve real property.

Under Maryland Code, Tax-Property Article § 13-203, the Maryland state transfer tax is generally 0.5% of the consideration for commercial real property transfers. This applies to the recorded deed, which is required in any asset sale that includes real property. In a conventional equity sale, no deed is recorded because the entity retains title to its real property; only the ownership of the entity changes. As a result, the state transfer tax generally does not apply to the real estate in an equity transaction. However, if the transaction involves a transfer of a controlling interest in a Maryland real property entity, Maryland can still impose transfer and recordation taxes under the controlling-interest rules.

County recordation taxes apply on top of the state transfer tax and vary significantly by jurisdiction. Because some Maryland counties use updated or tiered rate structures, the safest approach is to confirm the current county-specific recordation tax and any local transfer tax for the county where the real property is located before quoting a closing-cost figure in the LOI or purchase agreement.

For a Frederick County business that includes $1 million of commercial real property in an asset deal, the Maryland state transfer tax would generally be $5,000, and the Frederick County recordation tax would generally be $14,000 at the current rate of $7.00 per $500 of consideration, for a combined total of approximately $19,000 before considering any applicable exemptions or other local taxes. For properties valued in the millions, this cost difference between an asset deal and an equity deal can be a real factor in the structure negotiation. Buyers and sellers frequently negotiate who bears these transfer and recordation tax costs.

Maryland does not provide preferential tax rates for capital gains, unlike the federal system. All income, including capital gains from a business sale, is taxed at ordinary income rates for Maryland income tax purposes. The Maryland state income tax rate reaches a maximum of 5.75% under Maryland Code, Tax-General Article § 10-105, applicable to taxable income above $250,000 for individuals. Maryland counties and Baltimore City impose their own local income taxes as well, at rates ranging from 2.25% to 3.2%.

As a result, a Maryland business seller faces a combined state and local income tax rate on sale gains of approximately 8% to 9%, regardless of whether the gain is capital gain or ordinary income for federal purposes. The distinction between capital gain and ordinary income matters enormously for the federal portion of the tax bill but has no rate effect at the Maryland state and local level.

For non-Maryland resident sellers, Maryland real-property withholding under Tax-General Article § 10-912 is tied to the sale or exchange of Maryland real property and associated tangible personal property, with payment made through the recording and settlement process. It is not a blanket withholding rule for every sale of interests in a Maryland entity. Where the transaction includes Maryland real property, nonresident sellers should address the withholding issue early with closing counsel and their tax advisor to avoid surprises at settlement.

The mechanics of transferring business ownership in Maryland are governed by the Maryland Corporations and Associations Article. For corporations, stock transfers must comply with any restrictions in the entity’s charter documents, stockholder agreements, or buy-sell agreements. For LLCs, membership interest transfers are governed by the LLC’s operating agreement and, where the operating agreement is silent, by the default rules of the Maryland LLC Act. Many Maryland LLC operating agreements include restrictions on the transfer of membership interests that require the consent of other members or give remaining members rights of first refusal.

These contractual transfer restrictions are often overlooked in the early stages of deal negotiations, but they can create significant legal obstacles. A member who attempts to sell their interest to an outside buyer without complying with the operating agreement’s transfer restrictions may find the transfer legally ineffective, exposing the transaction to challenge by the remaining members. Pre-sale review of all entity governance documents is an essential step in any Maryland business sale process.

For Maryland businesses currently evaluating their entity structure, our analysis of Maryland’s proposed Corporations and Associations revisions (SB 631/HB 996) is relevant context for how Maryland’s corporate law landscape may be evolving.

Because buyers and sellers have structurally opposed interests on deal structure, experienced parties address the conflict through price rather than pure persuasion. The most straightforward approach is for the buyer to offer a higher total purchase price in exchange for the seller’s acceptance of an asset deal. The premium should, at minimum, compensate the seller for the additional after-tax cost of the asset deal compared to a stock deal.

Quantifying this premium requires a detailed tax model. The parties (typically through their respective advisors) prepare a side-by-side projection showing the seller’s net after-tax proceeds in each scenario under the proposed purchase price allocation. If the asset deal costs the seller an additional $300,000 in taxes compared to a stock deal, the buyer needs to offer at least $300,000 more to make the seller economically indifferent. In practice, sellers typically require something more than breakeven, because the asset deal is more complex and imposes additional transactional burdens on the seller.

This price adjustment approach is the most common resolution to the structure conflict in middle-market business transactions. The deal is documented as an asset purchase, the buyer gets the tax benefits of the stepped-up basis, and the seller is compensated for the additional tax burden through the purchase price.

For qualifying S corporation transactions, the § 338(h)(10) election is a frequently used structural compromise. The deal is documented as a stock purchase (which can be simpler for contract continuity and employment purposes), but the parties make a joint election to treat the transaction as an asset purchase for tax purposes. The buyer gets the stepped-up basis, the seller accepts asset-deal tax treatment, and the purchase price is adjusted to compensate the seller for the incremental tax cost of the election.

The § 338(h)(10) election has the added benefit of avoiding the contract assignment and third-party consent process that a legal asset sale would require, because the transaction is legally structured as a stock sale. Employees remain continuously employed. Licenses and regulatory approvals generally carry over. The election provides the tax benefits of an asset deal within the legal framework of a stock deal.

Earnout provisions, under which a portion of the purchase price is paid after closing based on the business’s post-closing performance, interact with deal structure in important ways. In an asset sale, earnout payments to the selling entity are generally treated as additional sale proceeds when received and are characterized according to the asset sale rules. In a stock sale, earnout payments received by the seller are generally treated as additional stock sale proceeds and are taxed as capital gain to the extent of the seller’s basis.

The tax treatment of earnouts can be complex, particularly under the installment sale rules of IRC § 453, which may allow sellers to defer recognition of gain until payments are actually received. Installment reporting is generally not available for depreciation recapture gain, which must be recognized in the year of sale regardless of when the payment is received. This distinction is another reason the recapture analysis must be done upfront before any deal structure is finalized.

For a comprehensive approach to managing contractual risk in business transactions, see our post on common contract mistakes Maryland business owners make.

In most business acquisitions, the parties sign a letter of intent (LOI) or term sheet before proceeding to full due diligence and definitive documentation. The LOI is typically non-binding on most terms but establishes the basic economic and structural framework for the deal: purchase price, deal structure (asset or stock), payment terms, earnout conditions, escrow requirements, and exclusivity period. While LOIs are not legally binding purchase agreements, they create strong practical and commercial momentum toward the terms they establish.

Once a seller signs an LOI agreeing to an asset sale structure at a given price, renegotiating the structure to a stock sale requires the buyer to agree to change the fundamental tax economics of the transaction. That concession comes at a cost, usually a purchase price reduction that reflects the value of the basis step-up the buyer would be giving up. Sellers who sign LOIs without understanding the structural implications often find themselves in a difficult negotiating position when they eventually do the tax analysis.

The practical lesson is clear: engage legal and tax counsel before signing the letter of intent. The structure question should be analyzed and the price adjusted for structure before the LOI is signed, not after.

Most LOIs include an exclusivity clause that requires the seller to stop marketing the business and negotiating with other buyers for a defined period (typically 60 to 90 days) while the buyer completes due diligence. This exclusivity period reduces the seller’s negotiating leverage significantly. Once the seller is locked into exclusivity with a single buyer, the buyer’s relative negotiating power increases, and any attempt to renegotiate structural terms faces a harder environment.

Additionally, the further into due diligence the parties progress, the greater the seller’s emotional and practical investment in closing the deal. Transaction costs accumulate on both sides. The seller has disclosed sensitive business information to the buyer. These dynamics all push toward closing on the terms established in the LOI rather than reopening structural negotiations. This is why the LOI moment is the most important strategic decision point in any business sale, and why sellers should approach it with fully informed legal and tax counsel, not just a general understanding that “asset deals are buyer-friendly.”

Selling a business is likely the largest financial transaction a business owner will ever complete. The tax and legal consequences of deal structure are not abstract concepts. They directly determine how much money ends up in the seller’s pocket after closing, whether the seller retains contingent liability for pre-closing events, whether the seller’s post-closing earnout rights are adequately protected, and whether the representations the seller has made in the purchase agreement expose the seller to post-closing liability.

Business acquisitions also involve a significant information asymmetry problem. Sophisticated buyers and their legal teams complete dozens or hundreds of transactions. Most business sellers complete one or two in a lifetime. Buyers and their counsel know where the leverage points are, what concessions to ask for, and how to present terms that appear seller-friendly while actually favoring the buyer. A seller without experienced transaction counsel is negotiating at a structural disadvantage from the outset.

The cost of legal counsel in a business transaction is not a luxury expense. It is an investment in maximizing the net economic outcome of the transaction, managing legal risk, and ensuring that the seller’s interests are fully protected throughout the process. The fee for experienced transaction counsel is almost always recovered many times over through better deal terms, more favorable tax outcomes, and avoidance of post-closing disputes.

A Maryland business transaction lawyer representing a seller in an acquisition brings several distinct contributions to the process:

• Analyzing the tax consequences of proposed deal structures before the LOI is signed and advising on how to structure the transaction to minimize tax exposure
• Reviewing the LOI and negotiating structural and economic terms before exclusivity is granted
• Coordinating due diligence responses and managing information disclosure to protect against misuse of confidential information
• Drafting and negotiating the asset purchase agreement or stock purchase agreement, including representations, warranties, indemnification provisions, escrow arrangements, and closing conditions
• Reviewing and negotiating ancillary agreements including non-compete agreements, transition services agreements, employment agreements for key employees, and consulting agreements for continuing seller involvement
• Addressing Maryland-specific requirements including transfer tax filings, entity dissolution or continuation, and compliance with the Maryland Corporations and Associations Article
• Coordinating with the seller’s CPA on purchase price allocation, Form 8594 preparation, and installment sale elections
• Managing the closing process and resolving any title, lien, or encumbrance issues that arise before or at closing

For businesses with general counsel relationships, having ongoing legal guidance in the months and years before a planned sale is especially valuable. Pre-sale entity cleanup, resolution of pending disputes, formalization of contracts with key customers and suppliers, and addressing governance deficiencies all make the due diligence process smoother and the business more saleable at a better price.

Buyers generally prefer asset sales because they receive a stepped-up basis in the acquired assets, can choose which liabilities to assume, and avoid inheriting unknown pre-closing liabilities of the selling entity. Sellers generally prefer stock sales because the proceeds are typically taxed at lower long-term capital gains rates and the transaction is structurally simpler. The negotiation over deal structure is fundamentally about bridging this gap, usually through price adjustments that compensate the seller for accepting the less favorable structure.

A § 338(h)(10) election allows a qualifying stock purchase to be treated as a deemed asset sale for federal income tax purposes. When the election is properly made, the target is generally treated as having sold its assets in a taxable deemed sale and then liquidated. The result is a basis step-up for the buyer. For an S corporation target, the deemed sale gain generally flows through to the shareholders rather than producing the classic double-tax result of a C corporation asset sale; for a subsidiary in a consolidated group, the tax consequences are governed by the consolidated return rules. The election is joint. The purchasing corporation and the appropriate selling party must consent, and if the target is an S corporation, all S corporation shareholders, including any who do not sell stock in the qualified stock purchase, must consent to the election. The election is filed on IRS Form 8023. The buyer typically pays a price premium to compensate the seller for accepting asset-deal tax treatment.

Depreciation recapture is the IRS mechanism for taxing previously claimed depreciation deductions as ordinary income when a depreciable asset is sold at a gain. Under IRC § 1245, gains attributable to depreciation on personal property (equipment, machinery, vehicles, furniture) are recaptured as ordinary income rather than capital gain. Under IRC § 1250, gains on real property include an unrecaptured component taxed at a maximum 25% federal rate. Sellers who have aggressively depreciated their assets, including those who used bonus depreciation or Section 179 expensing, face significant recapture exposure in an asset sale. This recapture can convert a large portion of what the seller assumes is capital gain into ordinary income taxed at rates as high as 37% federally, plus Maryland income tax.

When Maryland real property is transferred as part of a business asset sale, Maryland state transfer tax generally applies at 0.5% of the consideration, and county recordation tax also applies. County rates vary and should be confirmed for the county where the property is located. For example, Frederick County’s current recordation tax is $7.00 per $500 of consideration, while Montgomery County uses a tiered rate structure rather than a single flat rate. In a conventional equity sale, no deed is recorded, so deed-based transfer and recordation taxes often do not apply. But if the transaction involves a transfer of a controlling interest in a Maryland real property entity, Maryland can still impose transfer and recordation taxes under the controlling-interest rules.

C corporation sellers strongly prefer stock sales because an asset sale creates double taxation. First, the corporation pays corporate income tax at the federal rate of 21% on the asset-level gain. Then, when the after-tax proceeds are distributed to shareholders as a dividend or liquidating distribution, the shareholders pay tax again at their applicable capital gains or ordinary income rates. In a stock sale, only one level of tax applies at the shareholder level, taxed as long-term capital gain. For a typical small business transaction, the double tax in a C corp asset deal can cost the seller hundreds of thousands of additional dollars compared to a stock deal.

IRS Form 8594 is the Asset Acquisition Statement required under IRC § 1060. Both the buyer and the seller in an applicable asset acquisition must file it, attached to their respective tax returns for the year of the sale. The form requires both parties to report how the total purchase price was allocated among the seven asset classes established by § 1060. Both parties must use the same allocation and report it consistently. Inconsistent reporting between the buyer and seller is a red flag for IRS examination. The form is not required for stock sales unless a § 338(h)(10) or § 338(g) election is made.

Yes. Maryland recognizes limited successor-liability exceptions that can expose an asset buyer to certain pre-closing liabilities in specific circumstances, including express or implied assumption of liabilities, de facto merger or consolidation, and the “mere continuation” exception. Maryland has not adopted the broad product line or continuity of enterprise theories as general successor-liability rules. Asset buyers therefore still need careful due diligence, strong indemnification, and, where appropriate, escrow protection.

Goodwill and other § 197 intangibles acquired in an asset sale can be amortized by the buyer over 15 years under IRC § 197, providing a substantial recurring tax deduction. In a stock sale without a § 338(h)(10) election, the buyer takes over the entity’s existing basis in its assets, and no amortization deduction is available for the premium paid above book value. For the seller, goodwill proceeds in an asset sale are generally treated as long-term capital gain, which is one of the few favorable aspects of asset sale treatment. The treatment of goodwill is central to the price adjustment and § 338(h)(10) election analysis, because it is often the single largest asset class in a service-based or relationship-driven business.