A business transaction may be structured in various ways to transfer the ownership of the business to the buyer. The most common forms are share purchases or asset purchases. You may want to consult with a legal professional to determine the appropriate structure because each structure may have cost and tax consequences.
In a share purchase transaction, the buyer is buying all of the shares of the company, and as a result, the buyer will indirectly acquire all assets and liabilities of the seller. However, if steps are taken prior to closing to strip down certain assets, those assets and liabilities may not form part of the transaction.
In an asset purchase transaction, the buyer has flexibility to “pick and choose” which assets it wishes to buy, as well as the obligations and liabilities, if any, that the buyer will assume.
In this post, we will highlight the key differences between share purchases and asset purchases.
Key Differences
The following comparison chart provides an overview of some factors that may need to be considered when determining the structure of the business transaction.
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Share Purchase |
Asset Purchase |
|
|---|---|---|
|
Ownership |
The buyer will indirectly acquire all of the assets and liabilities of the company, unless certain assets or liabilities are disposed of prior to the share sale. |
The buyer can choose the assets it wishes to buy, as well as the obligations and liabilities. For example, the buyer may buy the goodwill of the company, including the seller’s trade name. |
|
Liabilities |
The buyer may be responsible for all of the risks and liabilities of the seller, unless the seller disposes of some of the liabilities or assets prior to the share sale. |
The buyer has the right to control the level of risk and liabilities it wants to take on. |
|
Taxes |
The buyer will inherit all tax liabilities and obligations of the seller.
The buyer will have to review the following: every asset the company owns; tax accounts; loss carryforwards; and tax liabilities, to ensure that the company is in good standing with its taxes.
The seller can take advantage of the lifetime capital gains exemption available on the sale of “qualified small business corporation shares”. The seller will report any capital gains and taxes on the taxable gain (only 50% of the proceeds will be taxable) when selling shares. |
The buyer will not inherit the seller’s tax issues; however, tax liens can be attached to some assets.
The buyer can write off the price of the assets at fair market value for tax purposes.
A corporation is considered a separate legal entity. This means that when the seller sells assets, the net after-tax sales proceeds by the corporation will be subject to tax again, when the corporation distributes those proceeds to its shareholders.
The sale of assets will trigger a sales tax. However, there are elections and exemptions that may apply. For example, both parties may elect to not have GST apply. |
|
Transfer of Contracts |
Generally, if the control of the seller is changing, all contracts, such as leases, will require consent of the party granting the lease. |
The transfer of specific contracts, such as licenses, permits, leases, etc., will require consent of the party granting the license, permit, or lease. |
Conclusion
There are a lot of variables to consider when entering a share purchase or asset purchase transaction.
It’s imperative that you conduct the appropriate due diligence to ensure that you know exactly what you are buying to prevent any unforeseen financial consequences.
If you have questions regarding buying or selling a business, you can call us directly at (778) 565-4700 or simply fill out our contact form to schedule a free consultation today
The preceding content is for informational purposes only and does not constitute legal or professional advice. To obtain such advice, please contact our offices directly.