Purchase or Sale of Business Contract San Diego
Purchase or Sale of Business Contract San Diego Summary
Buying a business in San Diego provides an alternative opportunity to starting a new business from scratch because an existing business may provide a buyer the opportunity to enter a “turnkey” operation with an existing client base and cash flow. Selling a business in San Diego may provide the seller an exit to facilitate retirement, pursue other business opportunities, or to capture gains. It is important for both the buyer and seller of a business to have solid contracts in order to:
• Know with certainty exactly what is being purchased or sold;
• Secure warranties and assurances from the opposing party;
• Effectuate the transfer of ownership as smoothly as possible; and
• Plan for the taxation issues surrounding the purchase and sale.
Whether you are a business buyer or seller, contact San Diego Corporate Law for a consultation to discuss your business sale options.
Purchase or Sale of Business Contract San Diego Details
Structuring the Purchase or Sale of a Business
The purchase and sale of an existing business may be accomplished in one of three ways:
- The sale of business assets;
- The sale of stock, membership, or other ownership interests; or
- Statutory merger or consolidation.
Each method is effectuated in a different manner, and the benefits and detriments of each type of acquisition is dependent upon the statutes of the states governing the businesses and transaction and the tax considerations of the transaction.
Sale of Business Assets
The benefit to purchasing the assets of a business rather than the business as a whole lies in the unknown obligations of the target business. While all the obligations of a business should be found in the balance sheet, sometimes the obligation is unknown to the seller or the costs associated with an obligation are as yet undetermined.
A prime example of an unknown obligation is a lawsuit against the target company. If a future litigant has not contacted the target business and made a claim for damages, the target company may not realize the legal claim exists. Litigation against a target company might also be pending at the time of a sale, and the seller may not know exactly how large a judgment against the target business might be.
In an asset sale, only the obligations appearing in the balance sheet are assumed by the buyer and any obligations not expressly assumed by the buyer remain the obligation of the seller.
Sale of Ownership Interests
Purchasing all the shares of stock or membership interest in a corporation or LLC is an easier way to acquire a business compare to an asset sale. When all the stock or membership interests are purchased, all the assets of the business are transferred to the new owner.
Another advantage to purchasing ownership interests lies in the burden an asset sale places on the transaction under “bulk sale” laws. Bulk sale laws require notice of an asset purchase be furnished to the creditors of the seller and allow creditors not receiving notification to settle debts against the purchased assets. However, when the ownership interests are purchased, and thus the assets purchased indirectly, bulk sale laws do not apply.
Statutory Mergers or Consolidations
A statutory merger occurs when a purchasing corporation or LLC purchases a target corporation or LLC, liquidates the assets of the target, and continues operating as the same purchasing corporation. Consolidation occurs when a purchasing corporation or LLC purchases a target corporation and emerges as a new corporation or LLC different from either the purchasing or target corporations or LLCs.
Apart from the non-tax considerations above, state and local governments impose taxes upon the transfer and sale of assets, including transactions in which businesses are purchased and sold. Sales taxes, taxes on real estate transfers, and taxes on motor vehicle registrations should be considered when choosing a method to purchase or sell a business and may be avoided with some methods of ownership transfer.