Just like when you sell a company there are two ways that you can buy a company. The purchase of a company that is unincorporated can only be accomplished by the purchase of the company’s assets . There are several advantages and disadvantages to either buying the shares or the assets of a company, and it is strongly recommended to obtain legal advice from a lawyer before entering into a contract. This article is intended to provide a general overview of selling a business and in no way should replace the solid legal advice from the lawyers at Ahlstrom Wright prior to completing your purchase.
Should I Buy A Corporation’s Shares Or Assets?
Ultimately, the decision to either buy or sell the corporation’s assets or shares should take into account practical business considerations, including the income tax ramifications, the purchase price (and whether it is cheaper to acquire the assets as opposed to shares), industry conventions, and whether the corporation is private or publicly traded. The legal implications of purchasing/selling shares or assets can also influence the decision making process
Pros to Buying a Corporation’s Shares:
- Share purchases typically do not affect the employment status of a business’ employees. This can be good news for a purchaser of a business that has long standing employees, who may be owed significant amounts of pay if their employment is terminated without cause. Subject to any terms in the employment agreement, a share purchase essentially allows the employment agreements to be automatically assigned to the new purchaser.
- Because there is significant advantages to the seller of a corporation’s shares, it is typical for the purchase price on the sale of shares to be lower than an asset purchase. There is also no GST payable on a purchase of shares.
- Overall, a share purchase minimizes disruptions to the operation of the business.
Cons to Buying a Corporation’s Shares:
- When buying the shares of a corporation, the buyer assumes the corporation’s liabilities associated with those shares. Those liabilities could include, among other things, unpaid taxes and remittances, claims on the corporation by suppliers, customers and employees, and unlawful activity. It is extremely important to investigate into a corporation’s potential liabilities prior to the purchase of their shares, unless you are okay with being saddled with a heavy financial burden. Luckily, the lawyers at Ahlstrom Wright are experts at uncovering and exposing the liabilities that a corporation may have lurking under its exterior.
- It will also be critically important prior to the purchase of a corporation’s shares to check into any third-party consent or other restrictions on the transfer of shares. Review of the corporate minute books is a fundamentally necessary due diligence procedure prior to purchase or sale of any shares. The lawyers at Ahlstrom Wright know exactly what to look for in order to best protect you against unauthorized sales and headaches further on down the road.
- When buying all, or most, of a business’ assets, it can sometimes trigger constructive dismissal of the business’ employees. If that happens, the employees will be owed some pay in lieu of notice of termination, which can add up to a significant bill.
Pros to Buying a Company’s Assets:
- One of the main advantages of buying assets over shares is that the corporation’s liabilities do not follow the assets, unless they are expressly attached to the assets being purchased. A classic example of the purchase of an asset is the purchase of a car. Typically, a person can buy a car and not have to be worried about assuming all of the seller’s liabilities. CAUTION: Like all things in the law, this is subject to many exceptions – more explanation below.
- When buying assets, it allows the purchaser to pick and choose the assets that they are purchasing. The purchaser can buy the good assets (those assets that the purchaser actually wants, and are not encumbered with liabilities), and leave behind assets which may not be as attractive.
- There are also some significant tax advantages to buying a company’s assets over the shares. The lawyers at Ahsltrom Wright are able to coordinate with your accountant on any asset purchase to ensure that everyone has a full understanding of the transaction and its ramifications.
Cons to Buying a Company’s Assets:
- The very real possibility that a third party may have an interest in the assets. For example, many lenders will require a corporation to grant them a security interest in the corporations assets to provide security for a loan. The lender will then register their interest in the Personal Property Registry, and that interest can sometimes survive purchases. This means that a bank can attempt to seize the items that you purchased because the person who you bought from defaulted on their loan.
- Another example of an encumbered asset is real property (ie. land) that requires environmental clean up. That type of liability attaches to the land and will follow the land regardless of a subsequent purchaser.
- There are many other interests that could encumber an asset, so it will be important for you to know if the assets you are buying are associated with any liabilities. The lawyers at Ahlstrom Wright know where to look to uncover third party interests, and can help protect you in the event the assets you want to purchase are encumbered.
How Will Buying A Company’s Assets or Shares Effect My Taxes?
One of the most influential factors in determining whether to proceed a purchase of assets or shares will be the tax implications. Typically, a buyer will want to purchase assets to increase the tax base for future capital cost allowance deductions and to allow interest cost deductions for loans taken to the buy the assets. You should always consult with an accountant on the potential tax consequences of a business acquisition, and the lawyers at Ahlstrom Wright are able to help coordinate with your accountant on any business transaction.
Always Seek Legal Advice Before Selling Your Business
The lawyers at Ahlstrom Wright in Sherwood Park, Alberta can help you determine the best type of business sale for your situation.
Are you considering buying a company or corporation?
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