Asset sale vs membership-interest sale

APA vs MIPA at a glance

Question	Asset sale (APA)	Membership-interest sale (MIPA)
What is bought	Listed assets: inventory, equipment, brand, lease, contracts, and the license where the state allows it to be sold	The ownership interests in the company that holds the license
Where the license ends up	With the buyer’s entity, through a transfer approval or a new license	It never moves; the regulator approves the new owners
Liabilities	Buyer takes only what it agrees to assume, plus what successor-liability law imposes	The company keeps all of them, known and unknown
Past 280E and income tax years	Stay with the seller	Stay in the company the buyer now owns
Contracts, lease, bank account, permits	Each must be assigned or replaced	Stay in place, subject to change-of-control clauses
Buyer’s tax basis	Cost basis in each asset under section 1060	Depends on entity type; often still a cost basis for an LLC
Seller’s usual preference	Second choice	First choice
Typical cannabis use	States that allow a license sale with approval; distressed and receivership sales; carve-outs of one location	Non-transferable license states; multi-license companies; deals where continuity matters

A stock purchase of a corporation works the same way as a MIPA for everything in this table except tax. This page is general education, not legal or tax advice.

What decides the structure in a cannabis deal?

The license rule decides first, and tax and liability preferences come second. In an ordinary small-business sale the parties pick a structure and the paperwork follows. In cannabis, the state may leave only one workable path.

• Licenses that cannot be assigned. California’s rule says licenses cannot be transferred or assigned. If every owner changes, the business cannot operate under new ownership until a new license is approved. If at least one existing owner remains, it can keep operating while the new owners are reviewed. That pushes California deals toward staged equity purchases.
• New application above a threshold. Oregon treats a change of 51% or more in ownership as requiring a new application, whichever contract form is used.
• Licenses that can be sold with approval. Michigan’s statute contemplates a license being transferred, sold or purchased with agency approval, and Illinois allows a dispensing license to be transferred with prior IDFPR consent. Asset deals are practical in these states.

The models are compared state by state on the state license transfer rules overview. Local permits add a second layer, and some city permits are harder to move than the state license.

Does an equity purchase avoid regulator approval?

No. Regulators look through the entity to its owners. An equity purchase changes the form you file, not the need to file. Illinois guidance reviews every addition or removal of principal officers for whether it has the effect of a transfer, and charges $5,000 per adult-use dispensary license. New York law voids a license on an ownership change made without prior written Board approval. Thresholds, fees and clocks are on change of ownership approval explained.

Either agreement should therefore be signed with approval as a closing condition. See regulatory-approval contingencies.

Liabilities: what follows the buyer

In a MIPA, everything follows. The company is the same legal person the day after closing. The items that matter most in cannabis:

• Open tax years. The IRS generally has 3 years from filing to assess, and 6 years where more than 25% of gross income was omitted. Aggressive cost of goods sold positions under 280E sit inside that window.
• Excise and sales tax collected but not remitted.
• The compliance record. Past violations stay attached to the license and count in future enforcement and renewal.
• Undisclosed owners, lenders or profit-share agreements that the regulator was never told about.
• Employment, product and contract claims.

In an APA, less follows, but not nothing. State successor-liability rules reach asset buyers. California requires a buyer to withhold enough of the price to cover the seller’s unpaid sales and use tax, or become personally liable up to the purchase price, unless CDTFA issues a clearance. Recorded liens also stay on the assets until released. The procedures are on tax liabilities and holdbacks in a sale.

Because a MIPA buyer takes more risk, the contract works harder: broader representations, a longer tax survival period, a larger escrow, and set-off against any seller note. Those terms are covered on reps, warranties, and compliance indemnities.

Tax: the two structures are closer than they look

Asset sale. The price is allocated across seven asset classes under section 1060, and both sides file Form 8594. The buyer gets a cost basis in each asset. The seller’s gain is taxed asset by asset, so inventory and depreciation recapture are ordinary income and goodwill is generally capital gain. The mechanics are on purchase-price allocation in cannabis deals.

Equity sale of an LLC taxed as a partnership. Most private cannabis companies are LLCs. When one buyer acquires 100% of a multi-member LLC, Revenue Ruling 99-6 treats the sellers as selling partnership interests and the buyer as purchasing the assets. The buyer takes a cost basis and files Form 8594; the sellers do not. A buyer of less than 100% generally needs the LLC to make a section 754 election to adjust the basis of its share of the assets.

Equity sale of a corporation. The buyer takes the company’s old asset basis. An election under section 338(h)(10) can treat a qualifying stock purchase as an asset sale for tax, but only for certain targets, such as S corporations and members of a consolidated group, and only with the seller’s agreement.

The cannabis twist. A stepped-up basis is worth less to a buyer whose amortisation is disallowed. For an adult-use business still under 280E as of September 2026, amortising a license or goodwill produces no current federal deduction, although the basis still reduces gain on a later resale. For a medical business now outside 280E, the step-up has its normal value. That shifts how hard each side should fight over structure for tax reasons alone.

Illustrative. A seller holds 100% of an LLC with a $400,000 basis in its interests and sells for $3,000,000. Of the price, $250,000 is attributable to inventory and $150,000 to depreciation recapture. Roughly $400,000 is ordinary income whichever structure is used, because partnership rules look through to those items, and the remaining gain of about $2,200,000 is generally long-term capital gain. For an LLC, then, the seller’s federal result is often similar in both structures. The real differences are liabilities and the license.

Contracts, lease, banking and staff

• Lease. An APA needs a lease assignment and landlord consent. A MIPA leaves the lease in place, but many cannabis leases treat a change of control as an assignment. See landlord consent and cannabis lease clauses.
• Bank account. An asset buyer opens a new account from scratch. An equity buyer keeps the account only if the bank approves the new owners, which is its own diligence process.
• Employees. In an APA, staff are terminated by the seller and rehired by the buyer, and agent cards or badges may need reissue. See employee transfer and agent badges.
• Track-and-trace. In an APA, inventory must be transferred between license numbers in the state system. See inventory and biomass at closing.
• Local permits and utilities. These stay with the entity in a MIPA; in an APA each must be reissued.

Hybrids used in cannabis

1. Drop-down, then equity sale. The seller moves the business into a clean new entity, where the state allows the license to move, and sells that entity. The buyer gets continuity without the old company’s history. It needs two approvals in some states; Illinois, for example, charges its fee per transaction.
2. Staged equity purchase. The buyer acquires a minority stake first and the balance after approval or after a lock-up ends. See staged closings and escrow pending approval.
3. Asset purchase with a new license application. Common where the target’s entity is too damaged to buy, including receivership sales. Expect a gap in operations unless the timing is managed.

Which structure fits which situation?

Situation	Usually points to
License cannot be assigned and continuity of operations matters	MIPA
Target has unfiled returns, tax arrears or an unclear cap table	APA, or a drop-down into a clean entity
Buyer wants one store out of a multi-store company	APA or drop-down
Seller is a C corporation worried about two layers of tax	Stock sale
Distressed seller, liens exceed value	APA through a receiver or assignee
Social equity or lottery license inside a lock-up	Neither until the lock-up ends; minority stake or option at most

Settle the structure in the letter of intent. Changing from an APA to a MIPA after diligence has started reprices the deal, because the risk the buyer is taking has changed.