Have you decided to take the plunge and invest in an incorporated business? The next step is to think about the type of investment you want to make, i.e. whether you want to purchase company assets or shares.
How do you choose between these two types of transactions? Which one is more advantageous for you as a buyer? What are the tax implications of each transaction?
In this article, the T2inc team explains the advantages and disadvantages of purchasing company assets and shares.
The pros and cons of asset purchase
Most of the time, buyers prefer to purchase a company’s assets. But why is this strategy more popular with buyers? Are there drawbacks to buying assets?
Here are more details on the advantages and disadvantages of purchasing business assets from the buyer's perspective.
Why purchase business assets?
One advantage of purchasing business assets is that the buyer is left with far fewer responsibilities than if they purchased shares.
By choosing this acquisition process, the buyer elects not to continue the legal structure of the business, and therefore does not bear responsibility for the company’s past. The buyer is simply purchasing the seller’s assets and rights.
This means that a buyer who purchases assets is not subject to claims made by the seller’s creditors, because they bear no responsibility for the contracts signed by the seller before the transaction.
Another advantage of purchasing business assets is the possibility of depreciating them over time. This strategy enables the buyer to reduce their taxable income and tax bill every year.
Finally, the buyer is not obliged to purchase all of a company’s assets. They can simply select the assets they want to purchase, which is an interesting advantage from a tax standpoint.
The disadvantages of purchasing assets
Of course, before making such an acquisition, the buyer must make sure that the assets really belong to the seller and are not mortgaged to a third party. They must also make sure that the seller has paid taxes diligently to avoid any tax problems.
The pros and cons of share purchase
Generally, shares are the acquisition method preferred by those looking to sell.
When selling shares of an incorporated company, the seller gets certain tax benefits. They can take advantage of several tax exemptions, such as a cumulative lifetime capital gains exemption of $892,218 (the amount in effect for 2021), which can save them a significant amount of money on taxes.
Buyers can also benefit from certain advantages of purchasing a company’s shares. Of course, there are also some disadvantages to this type of transaction.
Why purchase company shares?
For the buyer, one advantage of purchasing a company’s shares is that the price of acquiring the company through shares will usually be lower than acquiring it through asset purchase. When purchasing shares, the buyer does not need to compensate the seller for the remaining taxes that need to be paid.
Furthermore, the process of preparing for a share purchase is less exhaustive than for an asset purchase, so the costs associated with this step of the transaction are likely to be lower.
The disadvantages of purchasing shares
By purchasing a company’s shares, the buyer commits to taking on the responsibilities of the seller. The legal structure of the company remains intact and the contracts signed by the seller remain in effect. Therefore, creditors retain the right to claim what they are owed.
The buyer must accept responsibility for managing the decisions made and actions taken previously by the company’s shareholders and live with any potential consequences.
Shares can only be purchased from a company with an incorporated legal structure. Other business structures, such as sole proprietorships, do not have share capital.
It’s possible that the company in question or its shareholder agreement may have signed contracts restricting the sale of shares. One such restriction might be that under the terms of the commercial lease, there can be no transfer of shares without the lessor’s consent.
Assessing the value of a company’s shares is not an exact science. The estimate is based mainly on the company’s financial statements, but there are many other factors that can affect it. Since the buyer is often unaware of these factors, using corporate accounting specialists is strongly recommended in order to ensure the accuracy of the assessment.
Asset purchase or share purchase: which is better?
After weighing the pros and cons of both types of transactions, it’s easy to see that purchasing business assets is much more advantageous for the buyer. Sellers, on the other hand, are much more likely to want to sell their company’s shares in order to take advantage of the tax benefits.
In situations where the buyer and seller don’t agree on the type of transaction, they will need to negotiate so that both parties can benefit to a certain extent while limiting the disadvantages.
Want more tips on corporate accounting and taxation? Check out the T2inc blog to find out more.
If you need customized support with accounting and taxes, don’t hesitate to contact T2inc’s tax accountants.