When purchasing any product or service, a purchaser needs to know as best they can if the product or service will meet their needs. This notion does not change when buying a commercial enterprise. If anything, the stakes are higher than other purchases as the buyer is making a commercial investment. In that context, it is essential for a purchaser to know what the each kind of commercial purchase yields. If you are considering a commercial purchase and need information on the difference between buying a company and a business, this article details the essentials that can aid your decision making.
What is the Difference Between a Company and a Business?
A business is any commercial entity operating as a going concern that engages in continuous and repetitive activity to earn a profit. As the definition makes clear, it is a more general concept than a company. Conversely, the term company describes a business with a particular structure and specific attributes. A company is usually (but not always) limited by shares and can be proprietary or public.
A business describes an entity that can have any number of legal structures. For example, a sole trader can operate a business. Alternatively, a partnership is also a business structure. In effect, the word ‘business’ is structure neutral.
Proprietary companies are private and typically smaller. They cannot have any more than 50 shareholders under the Corporations Act 2001 (Cth).
Definitions of public companies usually focus on their differences to proprietary ones. Public companies have an unlimited membership and increased access to the public for funding purposes. Owing to their ability to receive money from individuals, they are subject to more regulation than their proprietary counterparts. They also have increased disclosure obligations.
However, the most important facet of a company for this discussion is that it is a legal person. As such, it is distinct from its shareholders, directors and employees. A company has perpetual succession and will continue to operate even if it has ceased trading.
In Australia, a company only ceases to exist when the Australian Securities and Investment Commission deregisters it. Understanding that may help you to understand the difference between buying a company and a business.
Buying a Business
When a person buys a business, they typically buy only the assets of that business. That includes stock, machinery and goodwill. They are not required to purchase that business’ liabilities. Of course, in some purchase agreements, a purchaser agrees to buys assets at a price that reflects a reduction for pre-existing liabilities.
For a transfer of business to be complete, the pre-existing employment arrangements between the old employer and employees need to be terminated. However, the purchaser must employ at least one employee within three months for the transfer to become completed. If the buyer wants to transfer employees, all employees need to make new agreements with the purchaser.
Also, purchasing the assets of a business can sometimes mean having to get the approval of third parties. For example, a contract to exclusively distribute a product could require the consent of the other contracting party before assignment to the buyer. Regarding necessary due diligence, purchasing a business is not necessarily easier than buying a company.
Buying a Company
If you buy a company, you purchase the shares in that company. As a legal person, the company itself remains the same. The buyer of a company acquires everything through the shares including assets, liabilities and tax obligations. Significantly, you also purchase the risk of litigation against the company.
You need to make sure all due diligence is done and done well. You must review all contracts to identify any change of control clauses. These terms allow parties to decide if they would like to continue the pre-existing business arrangement in the event of a change in ownership. You will need to know what these clauses mean for you. New employment contracts are not necessary, and the existing employee structure can remain the same.
Whether you buy a business or company, you will need experienced legal assistance. It is a significant commitment. Getting advice at the outset could very well help you to avoid difficulties later on. Contact LegalVision’s business purchase lawyers to assist you. Questions? Call us on 1300 544 755 or fill out the form on this page.
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