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.
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.
