Should You Incorporate Before Buying a Business in Ontario?

If you are getting ready to buy a business in Ontario, one question that often comes up early is whether you should set up a corporation first, or simply buy the business in your own name. It might seem like a small administrative detail, but depending on the facts, this decision can affect your liability, your financing options, and how the deal is taxed.

There is no single answer that works for every buyer. Some purchasers do end up buying through a corporation, while others may proceed personally, at least at first. Below, we walk through some of the reasons buyers consider incorporating before a purchase, along with a few of the legal, tax, and financing issues that may be worth reviewing before you decide.

Why Some Buyers Consider Incorporating First

A corporation is a separate legal entity from the person who owns it. Because of this, some buyers prefer to have the corporation, rather than themselves personally, sign the purchase agreement and take on the business. This can affect how contracts are entered into, how the purchase is financed, and how the business operates going forward.

In some cases, buyers set up a new corporation specifically for the purpose of the purchase, sometimes referred to informally as a numbered company. In others, an existing corporation may be used, or the buyer may decide incorporation is not necessary for their situation. What makes sense may depend on the size of the business, how it is structured, and the buyer's longer term plans.

Liability Protection Is Often a Key Factor

One of the more common reasons buyers look at incorporating is the possibility of limiting personal liability. Generally speaking, a corporation may be responsible for its own debts and obligations, which can, depending on the facts, help separate business risk from a person's personal assets.

That said, this protection is not automatic or absolute. Lenders and landlords will sometimes ask for a personal guarantee from the buyer, which can reduce some of the liability protection a corporation might otherwise offer. Whether this applies in your situation, and to what extent, depends on the specific agreements involved.

Financing Considerations

How you plan to finance the purchase may also affect whether incorporating first makes sense. Some lenders prefer, or require, that a loan be issued to a corporation rather than an individual, particularly where the business itself will be used to help secure the financing. In other cases, a lender may still ask the individual buyer to guarantee the loan personally, even if the corporation is technically borrowing the funds.

It is generally worth discussing financing plans with a lender or accountant early on, since the structure of the purchase can sometimes affect what financing options are available, and on what terms.

Tax Considerations

Tax treatment is another factor that may influence this decision, and it can vary quite a bit depending on whether the purchase is structured as a share purchase or an asset purchase, and whether a corporation is involved. In some cases, buying through a corporation may offer certain tax planning opportunities, though this depends heavily on the specific circumstances and is generally something an accountant or tax advisor should review in detail.

This article does not provide tax advice, and the tax consequences of any purchase structure should be reviewed with a qualified accountant before a final decision is made.

Legal Considerations in the Purchase Agreement

The way a purchase is structured can also affect the wording of the purchase agreement itself, including who is named as the buyer, what representations and warranties apply, and how closing conditions are drafted. If a corporation is being used, lenders, landlords, and sellers may ask for additional documents, such as corporate resolutions or personal guarantees, before the deal can close.

Depending on the facts, it may also matter whether the corporation already exists at the time the offer is signed, or whether it still needs to be incorporated before closing. Timing issues like this are usually worth reviewing with a lawyer as early as possible in the process.

Final Thoughts

Deciding whether to incorporate before buying a business is not a decision to make quickly or in isolation. It usually involves weighing liability protection, financing requirements, and tax considerations together, and the right approach can look different from one buyer to the next.

Speaking with a lawyer, along with an accountant, before you sign anything can help you understand the options available to you and how they may apply to your specific situation.

Frequently Asked Questions

Q: Do I need to incorporate before I can buy a business in Ontario?

A: Not necessarily. Some buyers purchase a business personally, while others choose to incorporate first. Whether incorporating makes sense depends on factors like liability, financing, and tax planning, and this can vary depending on the facts of your situation.

Q: Does incorporating protect me from all business liability?

A: Not entirely. A corporation may help separate business liability from your personal assets in some situations, but this protection is not absolute. Lenders or landlords may still ask for a personal guarantee, which can reduce the extent of that protection.

Q: Is it better to buy shares or assets through a corporation?

A: It depends on the deal. Share purchases and asset purchases are treated differently for legal and tax purposes, and the better option may vary depending on the business, the buyer's goals, and other factors. This is generally something to review with a lawyer and an accountant before deciding.

Q: When should I set up my corporation if I plan to use one?

A: This depends on your timeline and the specific deal. In some cases, buyers incorporate early in the process, while in others, the corporation is set up closer to closing. Since timing can affect financing and closing conditions, it is generally a good idea to plan this out with a lawyer well before the closing date.

Contact DevLaws

If you are considering buying a business in Ontario and want to understand your options around incorporating, financing, or structuring the deal, the team at DevLaws is here to help. Contact DevLaws today to schedule a consultation and talk through your specific situation.

contact@devlaws.com | +1 437 290 0424 | devlaws.com

Disclaimer

This article is provided for general information purposes only and does not constitute legal advice. It is not intended to create a lawyer-client relationship. Laws and regulations can change, and the information here may not reflect the most current developments. Every situation is different, and the information in this article may not apply to your specific circumstances. If you are considering buying a business and have questions about your options, you should consult a qualified lawyer, and where relevant an accountant, for advice tailored to your situation. DevLaws does not guarantee any particular outcome or result.