Lessons from my first exit

“My lawyer warned me that when I sell my business, I lose limited liability protection. If the purchase agreement didn’t limit my liability to the buyer, the buyer could later sue me for any amount, even if it exceeds what they paid in the acquisition.”

“Sales below $1M are usually asset sales, meaning that the buyer is purchasing assets from the business but not the business itself. So, I technically still own a company called TinyPilot, but I transferred all of its physical and intellectual property to the new owner.”

Aren’t these contradictory? If it’s an asset sale, the deal is between TinyPilot LLC and the buyer for the assets.

Author here.

Yeah, that seemed strange to me, too, but that was how my lawyer told me it worked. And the buyer's lawyer cared enough to fight about the exact amount of liability, so I assumed the buyer's lawyer felt that way as well.

In practice, it seems like liability protection would have to change in some way otherwise the seller could abuse the system. Like imagine that I sell the new owner $200k worth of inventory and then the new owner discovers that, unbeknownst to either of us, the inventory has some kind of defect and is unsellable. If the buyer comes back and says, "Hey, I want my $200k back," it would be strange if I'm allowed to say, "Oh, too bad for you. I've shut down the LLC that sold you that inventory and moved all the money to my personal accounts, so there's no money for you now."

A typical acquisition of the legal entity from the shareholders provides protection because there’s no limited liability in the deal (as it’s a sale by the shareholders (as individuals)). An asset sale has higher risk for the buyer (because the sale is, essentially, looting the corpse of a legal entity) with the benefit of not having any liability for the legal entity’s past deeds. Purchasing assets from the company while also expecting the former owner to be on the hook for the value of assets is trying to eat their cake and keep you on the hook to make them another cake.

That said, U.S. LLCs are not normal limited liability companies (like they are in the rest of the world). A U.S. LLC is a weird amalgamation of tax and law. Perhaps what you’re describing (as described to you buy your lawyer) is just one more weird aspect of U.S. LLCs.

(Outside of the U.S., a limited liability company is nothing like a U.S. LLC. The closest the U.S. has to a typical limited liability company is an Inc.)