Buying a business vs investing in stocks or real estate

People weighing where to put capital sometimes set an operating business next to stocks or rental property. They are different kinds of ownership. Buying a business means acquiring a going operation, while stocks and rental property are holdings. This page compares how they differ in involvement, regulation, tax character and financing. It makes no claim about returns or risk, and it does not say which suits a particular person. If the real choice is between two ways of owning a business, see buying a business vs starting one.

What buying an operating business involves

BDC describes a purchase as moving through a letter of intent, then due diligence and negotiation of the purchase agreement. It says due diligence gives crucial information on a target’s finances, prospects and legal issues, and gives the buyer access to the premises, records and, in some cases, key suppliers, customers and employees. BDC also asks buyers to find out who is actually running the business day to day, and whether customers leave when the vendor does. The buyer is therefore examining a specific business and negotiating its terms.

What holding stocks or rental property involves

The Ontario Securities Commission’s Investor Office, on its GetSmarterAboutMoney site, says stocks give part ownership in a company and are traded on a stock exchange, and that you can lose money on stocks if you sell at a lower value than you paid. It says some people invest in real estate hoping to re-sell at a higher price later, or by buying several properties to lease out for rental income, and it also mentions real estate investment trusts. In these cases the holder owns a security or a property, not the operation of a business.

How regulation and tax character differ

The Financial Consumer Agency of Canada (FCAC) says investments are regulated by multiple regulatory bodies, that every province or territory has a securities regulator, and that there are different tax rules for different types of investments. It also has a section on where to go with an investment complaint. On tax, the CRA says you generally have a capital gain or loss whenever you sell, or are considered to have sold, capital property. For rental property, the CRA says that in most cases, if you rent space and provide basic services only, you are earning income from property, but if you provide additional services such as cleaning, security and meals, you may be carrying on a business, and the more services you provide, the greater the chance it is a business. When a business owner later sells the business’s assets, the CRA says there may, depending on the situation, be a recapture or a terminal loss of capital cost allowance.

How financing is described

The Canada Small Business Financing Regulations list loans to finance the purchase of intangible assets and working capital costs, and allow loans for the purchase of real property only on stated conditions, including that the purchase is necessary for the operation of the borrower’s small business. The program has its own eligibility rules, so check them against the particular purchase. Ask any lender what it will finance for the asset in question.

Factors to weigh, not a recommendation

• If you would not run the business yourself, ask, as BDC suggests, who is actually running it day to day and whether key employees will remain after closing
• If you may need to sell later, note that the OSC’s investor site says stocks are traded on a stock exchange, while a business purchase runs through the negotiation and due diligence BDC describes
• If you plan to use a financing program, confirm that its rules cover the purchase you have in mind
• If the income would be rent, the number of services provided may affect whether it is property income or business income
• If you have limited time and budget, note that BDC describes due diligence and negotiating the purchase agreement as steps in buying a business

A lawyer, an accountant and, for securities, a registered adviser can look at your own position.