The entity you form decides your tax and your guaranty.

The entity you form has four jobs: hold the business, borrow the money, contain liability, and deliver the tax result you priced. Federal tax classification decides whether a basis step-up is available at all. SBA rules decide who signs the guaranty. Both questions get answered when you choose the entity, not at closing.

Which buyer entity can get you a basis step-up?

Basis step-up availability turns on federal tax classification, not on the label on the certificate of formation. An asset purchase produces the step-up directly. An equity purchase produces it only through an election, and the election a corporate buyer can make is not the election an individual buyer can make.

Most acquisitions financed this way are asset purchases, and an asset purchase delivers the step-up with no election. What follows is the exception for when the seller will sell only equity.

A Section 338(h)(10) election rides on a qualified stock purchase: stock meeting the section 1504(a)(2) threshold, eighty percent of vote and value, acquired in one corporation by another corporation by purchase within a twelve-month acquisition period. An individual buyer cannot make it. Neither can an LLC taxed as a partnership.

Law: 26 U.S.C. 338(d)(3).

The buyer-side problem is fixable. Form an entity classified as a corporation for federal tax purposes and have it buy the stock. The seller-side limit is not yours to fix. The election is available only where the target is an S corporation or a member, other than the common parent, of an affiliated group. A C corporation owned by individuals does not qualify, and where the target is an S corporation every shareholder must join, including those who sell nothing.

Law: 26 U.S.C. 338(h)(10); 26 C.F.R. 1.338(h)(10)-1(c).

Section 336(e) works differently. The regulation defines a qualified stock disposition by reference to stock of a domestic corporation sold, exchanged or distributed by another domestic corporation or by S corporation shareholders. It tests the selling side, not the buyer’s classification. An individual buyer and a partnership-classified LLC are both on the table.

Law: 26 C.F.R. 1.336-1(b)(6)(i).

Two limits survive. Stock transferred to a related person is not a disposition for this purpose. And the election is made by the seller and the target, it taxes a deemed asset sale, and you cannot compel it.

Law: 26 C.F.R. 1.336-1(b)(5)(ii).

Then comes the trap. A transaction that meets the qualified stock disposition definition and also qualifies as a qualified stock purchase is generally not a qualified stock disposition, subject to a narrow exception for a target subsidiary’s stock. Forming a corporation to buy the stock can move you out of Section 336(e) and into Section 338. Choosing one path closes the other.

Law: 26 C.F.R. 1.336-1(b)(6)(ii).

Consequence: pick the path before the letter of intent. Both elections need the seller’s agreement, and both get priced.

I ask for the target’s federal tax classification and its last filed return before I draw a structure chart, because the chart is worthless until I know what the target is for tax purposes.

Corporate classification is not free. A C corporation is taxed on its income and again when money comes out, and S corporation status limits who may hold the stock.

What if the business you are buying is an LLC and not a corporation?

Both elections operate on corporate stock. An LLC that has not elected corporate classification has no stock for federal tax purposes, so a purchase of its membership interests is neither a qualified stock purchase nor a qualified stock disposition. An LLC that has elected to be taxed as a corporation is a different animal, and its interests are stock.

So the first question is not what the company is called. It is how the company is classified. Ask for any Form 8832 or Form 2553 on file, and ask what was filed rather than what the seller believes was filed.

This is the case a first-time buyer misreads. One agreement, one transfer of interests, no bills of sale, no schedule of acquired assets. The tax does not follow the shape of the paper. Ask your CPA in writing how the purchase will be characterized and on which authority; Revenue Ruling 99-6 and 26 C.F.R. 301.7701-3 are the right things to ask about.

Does forming a new entity keep the seller’s liabilities away from you?

Not by itself. A purpose-formed buyer entity locates claims that follow acquired assets inside the entity that holds them, which is worth doing. It does not defeat successor liability doctrines, it does not survive an alter ego finding, and it does nothing about the guaranty you sign in your own name.

Successor liability is a state law question and the doctrines differ by state. Express assumption, de facto merger, mere continuation and fraudulent transfer are the usual routes through an asset purchase. Some states also impose tax liability on a buyer unless notice and withholding steps are followed. Read the statutes where the assets sit and where the business is registered, and put the steps on the closing checklist with dates.

The entity signs the purchase agreement, takes title, and is the intended defendant. It does not stop a claim. It gives the claim an address, and only if you keep it real: separate accounts, its own books, its own contracts, enough capital to do what it says it does.

A new entity is protection you can grant yourself. The guaranty is protection you give away.

Who has to sign the personal guaranty on an SBA 7(a) loan?

Holders of at least a twenty percent ownership interest generally must guarantee an SBA 7(a) loan. The regulation also lets SBA, or a lender acting under delegated authority, require full or limited guarantees from other individuals or entities without regard to their ownership percentage, if any. Below twenty percent is not a safe harbor.

Law: 13 C.F.R. 120.160(a).

Read the form you will sign. SBA Form 148, the Unconditional Guarantee, obligates the guarantor to pay all amounts owing under the note until the note is paid in full. SBA Form 148L, the Unconditional Limited Guarantee, is used where a full guarantee is not required and a payment limitation is agreed. Which form you get is the lender’s call, not yours, and SBA revises these forms.

Application. You form a holding entity, it owns the operating company, and you own it. SBA policy, as stated in the SOP in force in September 2026, counts ownership through the chain, direct and indirect. The layer adds paperwork. It does not dilute your percentage and it does not take you off the guaranty.

Consequence: the guaranty is of the whole note, not of your slice of it. Two owners at fifty percent each do not each guarantee half. Each guarantees all of it.

I read the guaranty and the lender’s term sheet before I read the purchase agreement, because those documents decide who is personally exposed and the purchase agreement does not.

The guaranty does not scale with your percentage. It scales with the note.

What happens if you bring in an investor at twenty percent?

An investor who ends up holding twenty percent or more of the post-closing equity, directly or indirectly, generally has to guarantee the entire loan rather than a proportionate share. That changes what the investor will accept, what the investor charges you for the money, and sometimes whether the investor participates at all.

So the cap table is a loan document. Build the post-closing ownership table before you agree on price, with direct and indirect percentages, and circle everyone at twenty percent or more. Those are your expected guarantors. Moving an investor below the line lowers the odds of a guaranty demand; it does not foreclose one.

Two further rules matter if the seller or a partner keeps a piece. Stated as of September 2026, under SOP 50 10 8, a partial change of ownership must be structured as a purchase of stock or membership interests, and an asset purchase is not eligible for that financing. Any new direct or indirect owner acquiring any interest in the operating company, however small, must be a co-borrower with that company. A selling owner who stays in below twenty percent must still guarantee the full loan amount, generally for the later of two years after final disbursement or until the loan has been current for twelve consecutive months.

That SOP also requires an equity injection for a complete change of ownership and limits how much a seller note on full standby can cover. Those figures move between editions. Ask your lender what it will accept as injection and what source-of-funds documentation it wants.

How should you hold the real estate if the deal includes a building?

The SBA program recognizes a separate real estate entity, called an Eligible Passive Company, that acquires the property and leases it to the Operating Company. The Operating Company must be a guarantor or co-borrower, and must be a co-borrower where the 7(a) loan includes working capital or other assets, including intangible assets, for its use.

Law: 13 C.F.R. 120.111(a)(5).

The conditions are specific. The lease must be in writing, must be subordinate to SBA’s lien, and the rents must be assigned to the lender as collateral. Rent cannot exceed the loan payment plus the passive company’s direct expenses of holding the property, such as maintenance, insurance and taxes. The lease, including renewal options exercisable solely by the Operating Company, must have a remaining term at least equal to the loan term.

Law: 13 C.F.R. 120.111(a)(3), (a)(4).

And the guaranty travels. Each holder of at least twenty percent of either the Eligible Passive Company or the Operating Company must guarantee the loan. The two-entity structure will not keep an owner off the guaranty.

Law: 13 C.F.R. 120.111(a)(6).

Which version of the SBA rules applies to your loan?

SBA policy sits in SOP 50 10, and the edition that governs is the one in force when your loan receives an SBA loan number. As of September 2026, that edition is SOP 50 10 8, effective June 1, 2025, as amended by Procedural Notice 5000-872764, effective September 30, 2025. Every SBA statement above is stated as of that date.

SOP 50 10 8.1 was issued August 14, 2026 by SBA Information Notice 5000-880695 and applies to loans receiving an SBA loan number on or after October 1, 2026. Filing an application in September does not freeze the September rulebook. The loan number does. Version 8.1 moves the change of ownership requirements into a new appendix and adds underwriting requirements, so a deal numbered under the next edition gets re-examined.

Ask your lender in writing which edition it expects to apply and to confirm your structure against it, and read the current SOP rather than any summary of it, including this one. No article can tell you what a lender or SBA will approve.

Does a state licensing authority have to approve your new entity?

Where the target holds a license — contractor, liquor, health care, transportation, professional — the issuing authority decides whether your new entity may hold it and how long approval takes. Many licenses do not pass with the assets, and many equity transactions require notice to the agency, or approval of the new owners, before closing.

What should you do before you sign the purchase agreement?

Before signing, a buyer should be able to name three things: the entity that will be formed, the people who will sign the guaranty, and whether the structure preserves a basis step-up. The steps below produce those answers, in an order that matters, because each one changes the next.

• Get the target’s federal tax classification in writing, with the last filed return and any election on file, and have your CPA state what basis you get.
• Decide assets or equity, then the buyer entity’s classification. Assets give the step-up without an election; corporate classification opens Section 338(h)(10) where the target qualifies and generally closes Section 336(e).
• Build the post-closing ownership table with direct and indirect percentages. Circle twenty percent and up.
• Send the lender the structure chart and ownership table, and ask which SOP edition it expects to apply.
• If real estate is in the deal, decide whether an Eligible Passive Company holds it, and draft the lease to the regulation’s conditions.
• Form the entity, get the EIN, and qualify it to do business before loan documents are drafted, so the name on the note matches the license and the deed.

Name the entity. Name the guarantors. Name the tax result. If you cannot do all three from memory, the structure is not finished and the purchase agreement is not ready for your signature.