Sale of Business | Sale of Shares

There are two common ways to dispose of a person's interest in a business. You can either sell the assets of the business or, if the business is operated through a corporation, you can sell your shares in the corporation instead. There are important differences, however, to keep in mind.

Selling the assets of a business means that the desks, computers, rights to the business name, etc are sold to the buyer instead of simply selling the shares in the corporation carrying on the business to the buyer.

From a Seller's Point of View

From a Seller's point of view, if a business has been incorporated, the Seller will usually prefer to sell their shares in the corporation. In many cases, this will result in lower income tax liability and in fact there may not be any income tax payable by the seller in some cases. If, however, only the assets of the business are sold, those assets may have been depreciated on the books of the corporation or business to a point below the selling price or there may be a profit over what the seller paid for the assets. If that happens, the seller will have to declare recaptured depreciation and/or a capital gain on his or her income tax return, resulting in the Seller having to pay income taxes.

From a Buyer's Perspective

it is often more desirable to purchase the assets of a business rather than to purchase the shares. There can be many reasons for this. They include:

  • If you buy the shares in a corporation, you are taking the corporation as it is, with all of its debts and liabilities. Some of those liabilities may not even be known at the time of purchase. If the government re-assesses the company for income taxes and penalties regarding past business by the seller, it is the same company as before so you will owe the taxes. You are also taking the corporation with its assets already partially or fully depreciated. The Seller may have already depreciated the assets of the business as an expense on the corporation's previous income tax returns so that there is little or no depreciation left for the Buyer in the future. Keep in mind that the undepreciated balance for assets shown on the corporation's financial statements may differ from the amount claimed on tax returns.

  • If you are purchasing the shares in the existing corporation, you may find next week or next year that someone comes to you with a claim against the Corporation regarding its past dealings before you bought the shares. It may be a claim by a customer, a third party or it may be an income tax re-assessment. The possibilities are infinite. The obligations and liabilities of a corporation do not change simply because someone else now owns the shares. You may have obtained an indemnity from the Seller saying that he or she will reimburse you for any of these liabilities but an indemnity is only as good as the willingness and the financial ability of the person to pay under it.

  • There may be tax benefits or government programs that have already been used up by the existing corporation in the past. Therefore they are no longer available to you. If you had bought only the assets of the business, you might have been eligible for the full benefits.

  • It's always possible that your accountant will tell you that they have looked at the corporation's financial statements and in this case, they don't think that the difference between buying assets and shares is significant enough to worry about. Then, it may only be a decision on whether you feel the risk of liabilities and reassessments is significant or not. The seller may have lowered the selling price to a point where you feel an attractive price compensates for the risk. You might be satisfied, through your investigations, that the business may be very low risk and the seller may be a person with strong business ethics and you may be satisfied that they did everything "by the book" so you have less to worry about. With proper advice from your insurance broker, product liabilities and other similar risks might be insured. However, all of that would be a decision you will need to make. A lawyer can't do that for you. In other words, in spite of my comments above, there may be some cases when you might be comfortable buying shares, in spite of my comments.

  • You may be only buying a part of an existing business, leaving the seller to own and run the balance of the business separately. Therefore it would not be practical or possible to buy all the shares in the corporation.

    Seek Professional Help & Advice

    There can be other advantages or disadvantages in buying the assets of a business only versus the shares in a corporation. My point is that if you are buying or selling an interest in a business, you need to think carefully about the way that your sale will be structured. You will need professional help in making this decision. As a lawyer, I will be able to help you with many of these decisions. I also strongly advise you to obtain the advice of a tax professional, such as a chartered accountant, at the same time. A person with only bookkeeping experience will not have sufficient tax knowledge to help. A tax professional may advise you to perform some preliminary restructuring to your business prior to the sale to help you save significant amounts on your income taxes. I can refer you to and help you deal with a tax professional if you do not have one.

    Many people will buy or sell a business or shares in a company on an agreement they have prepared between themselves. This may work with a business of very small value but even then, many problems may occur that a lawyer would have helped you avoid. It is very risky to attempt this type of transaction on your own.

    Other Considerations

    Some of the considerations I will help you with if you retain me to help you with your transaction are:

  • Prepare a legally binding agreement that matches the required structure of your transaction, with appropriate protection of your rights.
  • Ensure that the assets or shares purchased are free of claims and encumbrances.
  • Check to see if there are any governmental claims or orders against the business. There are various federal, provincial and municipal offices that need to be searched in order to do this properly.
  • Help you review the Lease of the business premises and obtain the Landlord's consent to the assignment of the Lease.
  • Ensure that the Seller's representations about the financial status of the business can be relied on later if something proves to be incorrect.
  • Have the business name transferred to the Buyer if necessary.
  • Prepare any necessary employment agreements, non-competition agreements, etc.
  • Handle the exchange of money on closing to ensure that the Buyer and Seller each receive what they are entitled to under the agreement.
  • Check for and make various adjustments that need to be made under the transaction.
  • Help with the preparation of applicable GST elections that might need to be filed.
  • Work with your tax professional to ensure that the transaction is structured and closed properly.
  • File appropriate documents or transfers with the applicable government registries.

    As each transaction is unique, there are also many other considerations that I will also take care of if acting for you as a Buyer or Seller.

    Please contact me if I can be of any assistance to you.

    Notice:The information on this website is general in nature only. It relates to Saskatchewan, Canada and may not be applicable in your jurisdiction. It does not constitute legal advice to you and no solicitor client relationship will be established. A conflict check would also be required before our firm can act for someone. You should seek specific legal advice regarding your circumstances from a lawyer entitled to practise law in your jurisdiction.
    * Richard Carlson Legal Prof. Corp. | Wednesday, May 22 2024 02:33 am UTC1 (-6 hrs for Sask)