Are you thinking about buying a restaurant or any other business? Your first major issue is to decide exactly what you are buying. Consider the following example.
“Tony” started a neighborhood Italian restaurant in Seattle over twenty years ago. His Seattle business lawyer helped him incorporate the business as “A Little Taste of Italy Inc.” Now, after some years of success, Tony wants to sell the business, retire, and move back to Italy.
You have been working for years as a Chef at several restaurants in Seattle. At your most recent job, your boss lives most of the year out of town and has left you in charge. You have experience in running every phase of a restaurant and dream of owning your own restaurant.
A common approach is to talk with Tony about how much he thinks the business is worth, how many years are remaining on the lease for the Seattle restaurant, and perhaps even discuss a price. However, at this stage, most buyers do not think about one of the most important issues: Will you buy Tony’s stock in A Little Taste of Italy Inc. or the assets of the business?
Does it make any difference to you as the buyer whether you purchase Tony’s stock or the assets of the business? The answer, most definitely, is YES.
Stock Purchase
If you purchase Tony’s stock in the corporation, here’s what you may receive, in addition to the assets of the business:
- Any potential lawsuits and other types of claims which may be filed against A Little Taste of Italy, Inc. based on events occurring long before you bought it.
- Duty to pay possible federal and state taxes which may result from an audit in the future, but relating to activity which happened prior to the sale.
- Hidden claims for back wages, discrimination, creditor’s claims, and other disputes.
When you purchase the shares of “stock,” all of the history and prior decisions made by the corporation become yours. From the viewpoint of creditors, government agencies, and injured parties, A Little Taste of Italy, Inc. is continuing to operate the Seattle restaurant, regardless of who owns the shares, even if you change the name after you purchase the stock.
In general, as part of purchasing the stock of an incorporated business, you get all the assets and also all of the debts, some of which may be unknown at the time of sale.
Asset Purchase
Fortunately, there is a way to reduce the risk of being responsible for these hidden claims: an “asset purchase.”
- When you purchase the assets of A Little Taste of Italy, Inc., you buy only the assets you select, and not any hidden or unknown claims.
- In an asset purchase, you get only the items described in the Bill of Sale — furniture and fixtures, inventory, customer lists and the location secured under a valid lease.
Therefore, in most cases, when you only buy the assets of a business, you are free of hidden claims of creditors, former customers and employees, and government agencies.
If you need the assistance of an experienced Seattle business lawyer or Seattle restaurant lawyer, please call Stephen M. Katz at (206) 525-5500.
Selling your business and reaping the rewards of years of hard work is the dream of every business owner. You need the right team behind you. Selling a business is different than buying one. Sellers and Buyers look at the transaction in opposite terms. The documents you used when buying your business can be useless to you as a Seller – they don’t look after your best interests.
You visit your doctor every year or two for a checkup, even if you are not sick. You bring your car to a repair shop for a tune-up or oil change, even if it is performing fine. 
How to decide whether to incorporate
Since our firm receives so many calls about the benefits of incorporation, we are starting a series on Business Formation. How to decide whether to incorporate is the first installment. A future article will address seven powerful reasons to incorporate.
The right business structure can save you money and protect your personal assets
With so much on your mind, it was easy to overlook one of the most important business decisions an owner can make – deciding the legal form of your business. Choosing the proper business structure, such as a sole proprietorship, partnership, corporation, or limited liability company doesn’t always get decided in these early stages. But, through hard work, you have achieved some success and it is now time to think about how to protect what you have built up.
You have a choice of whether to remain a sole proprietorship (or partnership if there is more than one owner) or to incorporate your business. The decision depends on several factors, and understanding the advantages and disadvantages of each option will help you to decide which is the most appropriate for your business. If you have valuable personal assets, such as a home or car, you should protect them. One of the main reasons for incorporating a business is to protect your personal assets.
Incorporation could mean the difference between success and failure
Many entrepreneurs don’t realize that the business form they choose could be the difference between success and failure in today’s competitive marketplace. If you want to succeed, you need all the help you can get. At the top of the list of safe bets is the corporate form of business. That’s why most businesses elect to incorporate. Incorporation gives you one critical advantage: protection from liability. That means your house, car, spouse’s salary, and retirement fund are safe from creditors.
How does this work? A corporation is a separate legal entity from the person who owns it. The corporation, not the owner, enters into business deals, performs services, borrows money, and engages in other business activity. Since the corporation is involved in these business deals, you and your personal assets will, in most cases, be protected from liability if something goes wrong.
For businesses with more than one owner, incorporating can often protect you from the actions and misdeeds of your co-owners. This is unlike a partnership, where each partner is personally liable for the business-related actions of all the partners.
Advantages to incorporating
While perhaps not for everyone, incorporating offers several distinct and money-saving advantages over the other choices. Some of those advantages include tax Savings, asset protection, perpetuity, and increased credibility.
Tax Savings. Everyone is looking to save taxes. When you incorporate, there are numerous tax advantages at your disposal that are virtually impossible to accomplish with other business entities. You create a separate and distinct legal entity. Because of this, there are many transactions that you can structure between you and your corporation to save big money on taxes. For instance, if you own a building, you can rent space to your corporation and claim depreciation and other expenses. Your corporation can then deduct the rental expense. You are prohibited from doing this if you are a sole proprietor or a partner in a partnership.
Asset Protection. If you operate as a sole proprietor or partnership, there is almost unlimited personal liability for business debts or lawsuits. In other words, should you go out of business or be a defendant in a lawsuit, your personal assets such as home, vehicles, savings, etc. are at risk. This is generally NOT the case when you incorporate. When you incorporate, you are liable only up to your investment in the corporation. The limited liability feature of a corporation, while not a guarantee, is DEFINITELY one of the most attractive reasons for incorporating.
Perpetuity. When you incorporate, you create a new separate entity (the corporation). It continues despite what happens to the individual shareholders, directors, or officers. This is NOT the case with sole proprietorships, partnerships or even limited liability companies. For example, if an owner, partner, or member dies, the business AUTOMATICALLY ends or gets wrapped up in legal red tape. Corporations, on the other hand, have unlimited life.
Increased Credibility. Let’s face it. Most people feel more secure and confident dealing with a corporation as opposed to a sole proprietorship. Having INC. or CORP. after your company’s name adds a touch of professionalism and credibility to your business dealings.
Disadvantages to incorporating
There is work involved in incorporating. Since corporations are ruled by state law, documents need to be filed with the state, officers must be elected, meetings need to be held on occasion with minutes kept and copies retained. We show clients how to do all of this. Also, although a corporation can apply for a bank loan, banks sometimes require a personal guarantee from a major owner.
Sizing up the choices
No one knows better than you the circumstances of your individual business. By looking at your options carefully, you will be able to make an informed decision. Then, you can put your energy where it belongs — into running a successful business.
As always, be sure to consult with an attorney before making any important legal or financial decision. While there are many advantages and money-saving reasons to incorporate, as I’ve said before, it’s not for everybody. However, you do owe it to yourself to find out more.
There’s no question that hard work and a little luck is what it takes to BE successful. But a little knowledge, especially when it comes to setting up your business, will help you STAY successful.
Steve Katz is a Seattle business lawyer whose practice includes corporate, contract, real estate, restaurant law, and business transactions. He has business clients throughout Washington and Oregon. He can be reached at (206) 525-5500.