Does buying through a new company protect me from the seller’s hidden debts?

A new company is a sound way to keep a purchase separate from your personal finances, but it is often mistaken for a way to leave the seller’s debts behind. The two ideas are different. One concerns who answers for what happens after you own the business. The other concerns which obligations come with the business you buy, and a new buyer entity does not change that.

What a new company does protect

Under the Canada Business Corporations Act, a corporation has the capacity and rights of a natural person, and its shareholders are not, as shareholders, liable for its liabilities or defaults apart from a few listed exceptions. A buyer that forms a corporation to make the purchase therefore keeps its owners’ other assets apart from the business’s later debts. Provincial corporate statutes have their own provisions, so check the one that governs your company.

What it does not do

If your new company buys the shares of an existing corporation, that corporation remains the same legal person with the same debts, tax history and employees. The debt has not moved. Your company now owns something that owes it, and the shares’ value reflects that debt. The buying entity does not limit the debt. The deal terms and your checks before closing do.

Debts that can follow the business anyway

Some obligations attach to a purchaser by law, whichever entity buys. British Columbia’s PST guidance says a purchaser who does not obtain a clearance certificate before buying a business is liable for an amount equal to what the seller owes. Its employment standards guidance says a purchaser takes on the seller’s obligations to employees under that Act. Quebec’s CNESST says the former and new owners are solidarily liable for labour-standards claims left unsettled at the sale.

How buyers deal with what is left

A clearance certificate, where a regulator issues one, is the regulator’s own confirmation of payment: British Columbia’s PST certificate, for example, confirms the collector has paid all outstanding PST and related penalties and interest up to the date it was issued. For everything else the work is checking and contract terms, which our answer on how to check a business for hidden debt walks through. Settle the structure and the entity together with advisers before an offer is signed.