As the name suggests, during an asset sale, the buyer acquires ownership of a company`s assets such as inventory, equipment and receivables. It`s easy to see why many buyers prefer this buying method that allows the buyer to choose which assets they want to buy and limits their exposure to risk. There are many factors to consider when choosing the right sales method for your business, including the selling price. Before proceeding with a sale, calculate and compare the after-tax result of the sale of shares in the company with the sale of assets of the company. This analysis not only helps to understand the impact of each choice, but also provides you with additional information that can help negotiate prices. As a general rule, taxable dividends from private companies and profits resulting from the disposal of property, including shares of a private entity that are not eligible for the lifetime capital gain exemption, may be considered as shared income if they are realized or received by certain related persons. If, as an individual, you sell your shares in the company, your proceeds – which go beyond the adjusted share cost base and certain expenses related to the sale of the shares – generate a capital gain that is only taxable at 50%. If these shares are considered QSBC (Qualified Small Business Corporation) shares, you can generally claim a lifetime capital gains exemption to protect all or part of the profits from tax. This lifetime capital gains exemption for QSBC shares is US$883,384 in 2020 and is only available to residents of Canada. In general, there are two types of shares that a company distributes to its shareholders: preferred shares and common shares. In a hybrid approach often used, shares are sold for a profit and the seller can claim the capital gains exemption for the sale of shares if the shares are eligible for the exemption.
Then, business assets whose profits are accumulated are sold through an asset sale that allows the buyer to have an increased cost base in those assets. The buyer can then consolidate both the shares and the individual assets through a reorganization. Note that the specific steps required to achieve a satisfactory result are more complex than here. You must use a share purchase agreement if you are buying or selling shares of a company (as an individual or organization). If your business entity cannot issue shares (for example. B if you are an individual contractor, LLC or partnership), you may consider an assignment of partnership interests or a contract of sale. The most important finding is that a seller retains ownership of a business with an asset purchase, but by buying shares, he loses ownership. Purchase price allocation is of particular importance to both buyers and sellers when selling assets. This will determine your taxes payable and the after-tax product as a seller. The allocation of purchase prices should be agreed and defined in the purchase and sale contract and is often an important negotiating point in the sale of assets. .