Some advantages of buying a sole proprietorship. Compared to starting a business from nothing, buying a sole proprietorship may allow you to make money from day one. If the sole proprietorship has an established name, or repeat customers, or a defined way of doing business that has been successful, you may be able to benefit right away. This is known as a “turn key” business.
Learn how to purchase a sole proprietorship with the following topics:
When you buy a sole proprietorship, you are actually purchasing (1) the ability of the sole proprietorship to generate income and (2) some or all of the sole proprietorship’s assets. Your goal is to purchase the assets that allow you to maintain the sole proprietorship’s business. Those assets are the assets that you must have in order to preserve the sole proprietorship’s ability to continue generating income.
Depending on the sole proprietorship, you might be able to purchase only specific, individual assets and leave the rest. Or, it may make sense for you to purchase all of the sole proprietorship’s assets and continue the sole proprietorship as an ongoing business. Assets include tangible assets, such as machinery and real estate, or intangible assets such as the sole proprietorship’s existing trade name (D/B/A name) and customer list(s).
To buy a sole proprietorship business, it’s likely that you’ll enter into a handful of agreements. The asset purchase and sale agreement, typically the core document, is discussed below. Additional legal documents include the assignment agreement and the assumption agreement. The assignment agreement will document the transfer of the sole proprietorship’s assets to your ownership. The assumption agreement will document your agreement to take on duties and responsibilities of the sole proprietorship, such as liabilities, if any.
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Buying into a sole proprietorship is like purchasing part of a sole proprietorship as an ongoing business. Your focus is on getting a piece of the income generating potential of the sole proprietorship business. When you buy into the sole proprietorship, the sole proprietorship will change into a partnership and you will be added as a new owner.
By definition, a sole proprietorship is owned by only one person, the sole proprietor. Your purchase of part of the sole proprietorship adds an owner. You and the original owner are now partners in the business and what was formerly a sole proprietorship (owned by one person) becomes a partnership (owned by two or more people). Click here to learn more about changing a sole proprietorship to partnership.
Your new partnership will be based on the original sole proprietorship’s established business. This means that you must make sure that the assets necessary to the original successful business make it over to the new partnership.
At its simplest, buying into a sole proprietorship may mean that (a) you and the original sole proprietor form a partnership; (b) the original sole proprietor contributes to the partnership all of the sole proprietorship assets; and (c) you contribute to the partnership the agreed on purchase price. Because you are buying into the sole proprietorship as an ongoing business, the purchase price is likely to be calculated based on the future revenue generating potential of the business, which may not be the fair market value of the sole proprietorship’s assets.
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As a corporation, buying a sole proprietorship business is for the most part as described above under Purchasing a Sole Proprietorship Business. The key difference is that your corporation gives you an additional way to pay for the purchase. You may be able to purchase the sole proprietorship using the corporation’s equity (stock), or cash, or a combination of cash and stock.
It’s possible that the sole proprietor is only interested in cashing out. If that’s the case, then it’s most likely that you will exchange cash and receive the sole proprietorship’s assets. You may also assume some or all of the sole proprietorship’s liabilities in exchange for a reduction in purchase price.
However, the sole proprietor may be willing to accept equity in exchange for the sole proprietorship’s assets. In that case, at the end of the transaction, the corporation will own some or all of the sole proprietorship’s assets. In exchange, the original sole proprietor will become a shareholder in the corporation.
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Your asset purchase agreement documents your purchase of the sole proprietorship. This contract details your agreement about issues such as: (a) the parties to the transaction, (b) the specific assets being purchased, (c) the assets that are not being purchased, (d) the purchase price, (e) how the purchase price is to be paid, (f) how the purchase price will be allocated between the assets, (g) the liabilities that will be assumed, (h) the parties’ respective representations and warranties, (i) agreements about actions that will or won’t be taken going forward, and (j) other topics that may be important to your particular transaction.
Buying a sole proprietorship business is likely to raise a few typical question. One question is whether you will purchase the sole proprietorship’s existing trade name. The sole proprietorship may be operating under a name other than the sole proprietor’s name. This name is known as the sole proprietorship’s “trade name,” or “doing business as” name, or “D/B/A.” In New York, a sole proprietorship that is operating under a trade name must register by filing one or more Business Certificates of assumed name. If the sole proprietorship has a trade name, that trade name may be a valuable intangible asset. If you purchase the sole proprietorship’s trade name, your asset purchase agreement will list the trade name as an asset.
Another valuable intangible asset could be the sole proprietorship’s customer list(s). Particularly if you’re purchasing the sole proprietorship as a going concern, the customer list could be a key asset. Purchasing the sole proprietorship as a going concern means that you intend to continue to operate the sole proprietorship’s business as is or with improvements. If you are purchasing the sole proprietorship as a going concern, and the business has employees whom you’ll be keeping, then your sole proprietorship asset purchase agreement may also discuss employment agreements.
The asset purchase agreement for a sole proprietorship may also deal with the issue of non-competition covenants and specific performance remedies. You may be concerned that the sole proprietor will sell you the business, then turn around and start-up the same type of business, in the same area, targeting the same customers. If you’re buying the sole proprietorship as a going concern, competition from the seller could destroy the entire reason you purchased the business. Your asset purchase agreement will deal with this issue by detailing the sole proprietor’s agreement not to compete, specifying the prohibited types of competition, clarifying the length of time that competition will be prohibited, and mandating penalties and specific performance remedies (e.g. amount of cash you will receive) if the non-competition agreement is violated.
These are only a few of the issues that your sole proprietorship asset purchase agreement may cover.
Click to speak to a free consultation lawyer about your sole proprietorship asset purchase agreement, or call to discuss (212) 658-1752.
When buying a sole proprietorship, taxes are an unavoidable issue. Typically, the purchaser will be able to acquire the sole proprietorship’s assets in a tax-free exchange. If you buy the assets in a piecemeal fashion, for tax purposes, each asset is likely to be considered purchased at a cost equal to fair market value. If you purchase the sole proprietorship as a going concern, the purchase price will be allocated among all of the sole proprietorships assets, both tangible and intangible. The allocation of the purchase price has important consequences for New York sales and use tax, income tax, and possibly indemnification and or insurance purposes.
Here are some other issues concerning taxes when buying a sole proprietorship:
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