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Legal Factors You Need to Know Before Buying a Business

Legal Factors You Need to Know Before Buying a Business

Posted By Boswell & Dunlap LLP || 20-Jan-2017

Many people all over the United States dream of owning a business. The idea of being one’s own boss is an essential part of the American Dream. It’s no surprise, then, that so many people attempt to start small businesses. Around 543,000 new businesses are formed each month, though only 2/3 of them survive even 2 years in operation. Of those that do survive, some small-business owners later decide to sell. Often, the decision to sell is mainly determined by tax changes, retirement, the pursuit of new opportunities, or burnout after many years of hard work. If you’re considering buying a business, which many do rather than starting one from scratch, there are some considerations to make beforehand.

You’ll Need a Lawyer

Unless you’ve studied law yourself, getting a business law attorney will be an invaluable part of purchasing a business. Not only will they know the local law regarding business purchases, but they will know how buying a business will affect you at the federal tax level. Your lawyer can also examine the seller’s contract or create one for the seller to agree to. It is generally more advantageous for a buyer and seller to customize the sales contract rather than rely on a broker. Having a great business lawyer will streamline this process.

Three Types of Sale

There are three ways to purchase a small business—through assets, stock, or mergers. A merger only applies if you plan on conglomerating this new business into your existing business, creating one larger business out of two.

Most buyers prefer asset sales because they get more tax benefits. Buying a business’s assets means purchasing facilities, vehicles, equipment, and inventory. This type of sale benefits you because you’ll be able to specify exactly which assets to purchase. Also, you would only be liable for the property acquired. Any problems with the assets still owned by the seller are still the seller’s responsibility, and you avoid dealing with stockholders who refuse to sell their shares. If you buy assets, you are also not required to comply with state and federal securities laws and regulations. However, you do not qualify for tax treatments as a tax-free reorganization, meaning you might pay more taxes on the purchase.

Sellers prefer stock purchase because it’s hard for you to calculate the value of the stock in question. Once the stock is purchased, the seller is also free from tax liability. A smart buyer will make sure sellers pay any tax liabilities before the sale is complete. Some prefer stock purchases because it’s a simpler process. Unlike the transfer of assets, you do not need the stock retitled under your name. Contracts, permits, and licenses can be transferred as they are. There is also a tax benefit from the purchase of stock. If you buy stocks, you can avoid sales or transfer taxes on assets bought.


In addition to taxes you may pay when buying the business, you may be faced with paying sales taxes the seller underreported. If the state comes after the company for unpaid sales taxes, you will be liable for their payment if you’ve bought the business. You can ask your lawyer to get a clearance certificate from the state tax authority which ensures you’re protected from any sales taxes belong to the former owner.

Ensure you’re fully prepared before venturing into the small-business arena. Contact us at (863) 533-7117 or fill out our online form for a free case consultation with one of our experienced business law attorneys.

Categories: Business Law

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