If you are considering buying a business in Florida, whether an LLC or a corporation, you likely already realize that agreeing on a purchase price is just the beginning. A successful business acquisition involves understanding the legal framework and nuances that come with different types of agreements. The three main types of agreements you may encounter are Membership Interest Purchase Agreements (MIPAs), Stock Purchase Agreements (SPAs), and Asset Purchase Agreements (APAs). Each has its own set of rules, risks, and rewards, making it essential to be informed.
Let’s dive into each of these agreement types, explore their differences, and explain how they align with Florida business laws. The goal is to give you the insight to navigate your acquisition with confidence.
Membership Interest Purchase Agreement (MIPA)
A Membership Interest Purchase Agreement (MIPA) is the standard agreement when purchasing an ownership stake in a limited liability company (LLC). In Florida, LLCs are considered separate legal entities, where the owners are referred to as “members.” When you enter into a MIPA, you are buying the seller’s interest in the LLC, along with all rights, responsibilities, and obligations tied to that membership.
Key Considerations for MIPAs:
Operating Agreement: LLCs often have an operating agreement that dictates how membership interests can be transferred. This agreement might include restrictions such as a right of first refusal or approval from other members. It’s critical to review this document to understand any conditions that could affect the acquisition process.
Liabilities: Purchasing a membership interest doesn’t just involve acquiring assets, it can also mean assuming liabilities. As the old saying goes, “buyer beware,” yet here, understanding the fine print is crucial.
Stock Purchase Agreement (SPA)
A Stock Purchase Agreement (SPA) is commonly used when buying shares in a corporation. Unlike an asset purchase, buying stock means acquiring both corporation assets and liabilities, including any outstanding debts, legal obligations, or pending lawsuits.
Key Points to Consider with SPAs:
Due Diligence: Conducting thorough due diligence is essential before completing the acquisition. You will want to examine the company’s financial records, contracts, employee agreements, and any current or potential legal issues. Due diligence is crucial to understanding the full scope of what you are actually acquiring.
Assumption of Liabilities: In a stock purchase, you’re typically assuming both the company assets and liabilities. This could include everything from debts to pending litigation, highlighting the importance of understanding what you are acquiring before finalizing the deal and putting ink to paper.
Florida Corporate Law: Florida’s corporate laws govern stock transfers. Further, a corporation’s bylaws may have specific provisions on how shares may be transferred. It is essential to follow these protocols to ensure compliance and avoid any legal complications.
Asset Purchase Agreement (APA)
An Asset Purchase Agreement (APA) is often preferred when the buyer is focused on acquiring specific assets of a business, such as real estate, equipment, or intellectual property, rather than taking over the entire company. With an APA, you can select the assets you want while leaving unwanted liabilities behind.
Why APAs Are Attractive:
Asset Selection: One of the primary advantages of an APA is the ability to handpick the assets you wish to acquire, whether that’s property, inventory, or even customer contracts, without inheriting the liabilities associated with the entire business.
Liability Protection: With an APA, you generally avoid assuming the seller’s liabilities unless they are specifically tied to the assets you’re purchasing. However, be cautious about hidden risks, such as unresolved legal issues or environmental liabilities that could surface after the deal is closed.
Uniform Commercial Code (UCC): Florida’s Uniform Commercial Code (UCC) governs the sale of certain assets, including personal property. You may need to follow specific steps, such as identifying and recording security interests, to complete the transaction properly. Understanding the UCC process is crucial for ensuring that your acquisition is legally sound.
Which Agreement is Right for You?
The best choice of agreement depends on the specific details of your acquisition. Here are some factors to help guide your decision:
LLC vs. Corporation: If you’re acquiring an LLC, a MIPA is typically the most appropriate agreement, as it governs the transfer of membership interests. For a corporation, an SPA is usually the preferred option. However, if minimizing liabilities is a priority, an APA might be the best choice, as it allows you to select only the assets you want without inheriting debt or other risks.
Liability Concerns: If avoiding liabilities is your main concern, an APA offers the clearest path to protecting yourself. MIPAs and SPAs, on the other hand, usually involve some level of liability transfer, so it’s important to weigh these risks carefully.
Tax Implications: Each type of agreement comes with its own tax considerations. For example, asset purchases may trigger sales tax on certain assets, while stock or membership interest transactions could be subject to capital gains tax.
It is always advisable to consult with a qualified tax attorney or CPA regarding your specific situation. This information is for general purposes only and should not be relied upon as legal or tax advice.
About the Author
Trevor Allen, Esq., is an associate attorney at Woodward, Pires & Lombardo, P.A., where he focuses on business and real estate law.