Thinking of Buying a Business? Assets versus Shares
If you’re thinking of buying a business, which many people do as a second career, it is important to decide if you are going to buy shares or assets. Let’s take a look at the difference.
When purchasing shares, you can buy out the shares of one or more shareholders, or all of the shareholders in order to own the entire business. In buying shares, you own the contacts, assets, licenses, staff of the company and debts. By purchasing shares, you will avoid having to pay sales tax and land transfer tax.
If you purchase assets, you are basically buying the inventory, equipment, land and goodwill of the business. In addition, employees are technically terminated, although they can be re-hired by the new owner.
Buying assets is more common for smaller companies because it allows the purchaser to only buy the assets they wish to buy, meaning they don’t have to purchase all the all the assets in the company that they don’t find valuable. The cost of assets are usually sold at fair market value, allowing for more depreciation that is claimable by the purchaser.
One of the biggest differences between buying shares and buying assets is in the liability. If you buy shares of a company in 2015, and that company is audited in 2015 and it is found that the company owes Canada Revenue Agency from 2013, the new owner is on the hook for those outstanding liabilities. You would also be liable for an outstanding invoice that had not been paid prior to your ownership. If you buy assets, the new owner is not liable for the debts of the company, making an asset purchase less risky.
Often, the person selling the business prefers a share sale, while the person buying the business prefers an asset sale. Whether you find yourself in that situation, or if you are just investigating buying a business, it is advisable to talk to a lawyer who is knowledgeable in those areas. You can save yourself a lot of headaches down the road by making the right purchase decision up front.
Note: This information is provided as a general overview. You are encouraged to speak with your lawyer for more detailed information.
This article appeared in Ottawa Valley Business.
Links For More Information
The following links are provided as additional general information. Please speak to your lawyer for specific questions before moving forward with a decision to incorporate.