Today I would like to present some discrepancies between purchasing an enterprise and purchasing shares of a limited liability company. When a businessman approaches a decision on acquisition he must answer the question what he wants to purchase. Prior to such a decision it is always advisable to reconsider legal consequences, that may come along with the chosen solution.
First major difference between buying an enterprise and buying shares of a limited liability company is liability for obligations of acquired object. The Civil Code states that acquirer of an enterprise is jointly and severally liable with vendor for any obligations of vendor, which had arisen in connection with the enterprise. However the liability is limited to the value of the purchased enterprise. Whereas, when buying shares, the acquirer risks only the sum he paid in exchange for shares, because if the company turns out to be in debt and have no value shareholders are not liable for obligations of the company.
There is a second discrepancy on field of tax law. When it comes to the income tax, it has to be paid either by former shareholder (in case of purchasing shares) or by the selling entity (in case of purchasing of enterprise). Furthermore when the vendor of shares is a foreign person, he must take into consideration the treaties on avoiding double taxation to see where he needs to pay the tax.
Acquirer cannot qualify the expenditures borne on the acquisition of an enterprise as a current cost, because according to tax law they will be subject to amortization. Moreover the ?business name? (the amount that exceeds the market value of individual assets) will also be subject to amortization. In contrast, acquisition of shares does not constitute the cost at the time of acquisition but at the time of anew vending.
There is no VAT tax imposed either on the acquisition of shares or enterprise but the acquirer must pay the tax on civil law transactions. The amount of tax will vary. In case of acquisition of shares the tax rate will be 2% and acquisition of an enterprise is taxed with 1% to 2% the tax rate, depending on the components of an enterprise. The acquirer of an enterprise must also beware of any tax arears arisen prior to the date of acquisition, connected with an enterprise, because he shall be liable for them.
Another important discrepancy regards the obligations and rights stemming from civil contracts. Every enterprise concludes contracts to run its business, whether it is a lease or contract for the supply of resources. When one purchases only shares of a company nothing changes in the matter of contracts concluded by the company. It means that the company continues to be a party to such contracts. On the other hand the issue of contracts appears different in the event of purchasing the whole enterprise (not its shares). Acquirer doesn?t automatically step into shoes of the vendor. As a general rule only rights and claims pass on to the new owner. However any specific contract may contain provisions stating that the transfer of rights is forbidden unless consent by contracting party granted. Therefore acquirer ought to scrutinize carefully all contracts concluded by targeted enterprise. On the contrary transfer of obligations always require the consent of obligee.
Last difference I would like to present in this article is in the employment law relations. When it comes to acquisition of an enterprise all employees follow the sold enterprise, meaning that automatically become employees of the acquirer by virtue of law. On the other hand acquisition of share does not change anything in the employment relations, thus employees are still employed by the same company.
Now you know what matters you should pay attention to. It?s time to invest.
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