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It can be confusing when discussing buying a business versus a company as many people use the terms interchangeably. A business is a commercial trading endeavour that is carried out and owned by a legal entity. In Australia, there are several different types of legal entities, with the most common being; sole trader, partnership and company. Each of these are legal entities as they can own assets, be sued and enter into contracts with other legal entities. Below, we will explain the difference between buying the assets of a business and the shares of a company. 

What Is a Business? 

A business is a trading activity that runs through one or more legal entities. These trading activities are typically confined to one type, such as a restaurant. Where you are carrying on a business to gain income, you must register for an Australian Business Number (ABN). Gaining an ABN will help to identify that business operation. You can register for an ABN through the Australian Business Register (ABR). The ABR is part of the Australian Taxation Office. Once you have an ABN, you can register your business name. You should register your business name where you are carrying on a business that is not the same as your name, such as where you are a sole trader. Or if your business name is not the same as your company name, such as where you have set up a company. 

What Is a Company?

In Australia, a company is a legal entity that consists of shareholders and directors or secretaries. The shareholders are the legal owners of the shares that form a company. This is commonly known as the equity. Directors and secretaries are the officers in charge of the company and conduct day-to-day decision making. 

In most instances, a company is a proprietary company, meaning it is private and not publicly traded. Proprietary companies have certain requirements and restrictions. The main requirement is that there must be at least one director that ordinarily resides in Australia. Also, there can only be up to 50 shareholders. For this article, the type of company that we will refer to is a proprietary (private) company. 

Buying a Business 

When you are purchasing a business, this means you are purchasing the assets that are used to operate the business. This can include the equipment, contracts, lease and intellectual property, among others. As a new legal entity is purchasing the business assets, it means there is a transfer of ownership. 

You may be looking to purchase a business as a going concern. This means you are buying all of the assets necessary for the continued operation of that specific business. Generally, you do not need to pay GST on the purchase price. It is also possible to purchase specific assets that the business uses. For example, you may be looking to buy only the equipment and arrangements with suppliers, but not the business name and other components. In this instance, you must pay GST but can typically claim this back as a tax credit. 

Buying a Company

When buying a company, you are purchasing the shares that compose that company from the shareholder that currently owns them. During this process, the previous shareholder transfers the legal ownership of the shares to you. 

For example, a company has 100 shares in total. Bob and Mary each own 50 shares. If you purchase all 100 of the shares, you would take over control of the company. Under this situation, if both Bob and Mary were directors, they would resign as part of the transaction. Consequently, you become the company director. This transaction is a share sale or share purchase; both have the same meaning. 

Benefits of Buying a Company 

The main benefit of a share sale relates to the tax consequences of the sale. This depends on your individual circumstances, and you should seek tax advice early to determine the most appropriate transaction structure. 

There is no need to transfer employees as their employment under the company continues. If some key employees or managers are crucial to purchasing the business, then carrying out a share sale can better address the continuation of their employment. While all of the contracts of the business will remain with the same legal entity, and you may still require the consent of the other contracting party to continue that contract. This is common in leases and equipment finance arrangements.

Risks of Buying a Company 

When taking over ownership of company shares, you take on any past risks from trading or any liabilities, such as bank loans. The Share Sale Agreement will set out specific promises that the seller makes about the business and its past activity. These are warranties. If any of the seller’s warranties are untrue and you suffer a loss, then you can typically bring a claim to recover this loss. Share Sale Agreements are technical, legal documents that require the expertise of experienced lawyers to try and reduce or address the risks of a transaction. 

Benefits of a Buying the Assets 

When purchasing the assets of a business, you do not take on any of the past trading risks of a company. This means that you take all of the assets of the business. If you endeavour to draft your business sale agreement correctly, you will not take on any of the past risks of the business or company. This is the single biggest benefit over purchasing a company via a share purchase. Where the business sells equipment that can break down or has warranties (in the traditional sense), you will need to discuss how this will work between yourself and the seller. Practically, there is no requirement for you (as the new owner) to honour any warranties or fix defective equipment. However, this may reflect poorly on the business, and you should consider this during negotiations. 

Key Takeaways 

Businesses are commercial trading activities designed to generate income and are owned by a legal entity. There are many different types of legal entities, companies being one such separate legal entity. There are several considerations to look at when thinking about buying the assets of a business or taking over ownership of the shares of the company. The single biggest risk is that you take on the past trading risk of the company when you assume ownership of the shares. However, tax and ease of taking ownership may make this the preferred transaction structure. 

Commercial transactions are technically complex, but it is essential to understand any risks before you enter into any transaction. If you require assistance with the sale or purchase of a business, contact LegalVision’s business sale/purchase lawyers on 1300 544 755 or fill out the form on this page.

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