Should I buy a business through a newly incorporated company?

Many buyers incorporate a company to make the purchase, so the business sits in a separate legal person from their personal finances. The practical questions are about timing and credit: when the company must exist, what a company with no history can borrow, and which entity ends up holding the contracts, permits and accounts. Each is worth settling before an offer is signed.

Incorporate before you sign

Both the Canada Business Corporations Act and Ontario’s Business Corporations Act say that a person who enters into a written contract (in Ontario, an oral or written one) in the name of a corporation before it comes into existence is personally bound by it, unless an exception applies, such as a term in the contract expressly saying the signer is not bound. A corporation may later adopt the contract, and a court can adjust the obligations, but adoption is not automatic. Having the company exist before the offer is signed avoids leaving you personally on the hook. Other statutes may differ.

A new company has no track record

A lender has no operating history to assess in a brand-new company, so it may ask the buyers behind it to guarantee the loan. The federal Canada Small Business Financing Program’s guidelines, for example, say a lender may secure a loan with a personal or corporate guarantee. Understand what you are agreeing to personally before the company signs. Our answer on buying through a holding company covers a related structure.

Permits do not follow automatically

If the new company buys the business’s assets rather than its shares, it may not inherit the seller’s permits and licences, and some cannot be transferred. Oakville says its business licences are non-transferable, and Manitoba requires a change of ownership of a food business to be registered with the public health inspector. Ask each issuing body what it requires of a new owner and a new legal entity.