You want to buy a business but what are you actually buying – the assets of the business or the shares of the business? What is the legal status of the business that you are proposing to purchase, is it a sole proprietor or a corporation? A sole proprietor is a person who owns the business in his or her name personally. If the business is incorporated, the business assets are owned by a legal entity. The corporation has limited liability meaning that the creditors of the business may not be able to go after the personal assets of the owners of the business.
If you are buying the assets of a business, the purchase and sale agreement will identify the specific assets which you are acquiring and which liabilities, if any, you are assuming. If the asset or liability is not on the list, you did buy that asset nor did you assume a liability you knew nothing about. If you buy the shares of a business, you assume all the liabilities of the business, whether they are recorded or not. You may have an indemnification from the former owner however, the business may be required to pay first, then recover, if possible, from the old owner the cash outlay.
From a tax perspective, if you purchased assets, you will be able to deduct the cost of the assets over time as either capital assets or goodwill. There will be some tax relief. If some of the assets are land and building, you will only be able to depreciate the building and not the land. If the original cost of the building was $100 because it was purchased 50 years ago and now it is worth $1 million, if you purchase the asset, the land and building will have a cost of $1 million in your accounting records. If you purchased the shares of the company, you may pay $1 million for the shares of the business but the land and building will be reflected in the accounting records with a $100 value. You will get no write off for the purchase price of the shares unless you sell the shares or do a corporate reorganization where you may be able to bump up the value of the land and building to $1 million. You should contact your tax advisor or tax lawyer for advise in this matter.
Remember, there are different tax strategies used when buying shares of a business instead of the shares.