Buying an Existing Business vs Starting New in Newfoundland and Labrador

Deciding between buying an existing business and starting your own is partly a money question and partly a legal one. A purchase gives you customers, staff and a lease already in place, but it can also give you the seller's debts and obligations. A startup is slower to build, but you choose each commitment yourself.

This article lays out the main legal differences in Newfoundland and Labrador: employees, leases, tax and other liabilities, security interests, and how you hold the business. It is general information, not advice. The details depend on how the deal is structured and on your industry.

This article covers the law of Newfoundland and Labrador.

Employees: inherited service versus a clean start

If you buy a business as a going concern, its employees usually come with it. Under the Labour Standards Act, where an employer transfers its undertaking to another person, employment with the new owner is treated as continuous with the period worked for the first employer. An undertaking includes a trade, industry, occupation or business carried on by an employer, which is why this applies to a sale of a business.

In practice, the seller's years count if you later end someone's job. Notice must be in writing, and the length depends on continuous employment: 1 week for 3 months to under 2 years, 2 weeks for 2 to under 5 years, 3 weeks for 5 to under 10 years, 4 weeks for 10 to under 15 years, and 6 weeks for 15 years or more. Longer written notice applies if an employer intends to terminate 50 or more employees within a 4-week period.

A startup has no inherited staff. You hire new employees, and their service starts on their own start date.

If the workforce is unionized, a collective agreement, certification or pending application covering the affected employees continues and binds the purchaser. The parties can apply to the Labour Relations Board, which can modify agreements, amend certifications or decide bargaining units, and the purchaser need not bargain for the affected employees until the board decides the application.

Liabilities you may inherit

A startup has no past. A purchase may carry the seller's history. For workers' compensation, if a business with an unpaid assessment is sold, leased or transferred, the commission may determine that a person is the successor and collect the unpaid assessment from that person. That power also reaches a business that changed ownership, was reincorporated or restructured, so a share sale or restructuring does not by itself avoid it.

For provincial tax, unpaid tax is a first lien in favour of the Crown on the entire assets of the taxpayer's estate, and it continues until paid or until the minister issues a clearance certificate. A buyer of assets should check for this lien.

If you buy a company and become a director, each director at the time of a failure to pay tax is jointly and individually liable with the corporation, so you can face liability for failures during your term.

Lease, equipment and security interests

Taking over an existing business often means taking over its lease. The short-form covenant in the Conveyancing Act says a tenant may not assign the premises during the term without the landlord's written consent, which is not to be arbitrarily or unreasonably withheld. That covenant applies as an implied term only where the lease uses the statutory wording, and a written lease may say something different, so read the actual lease.

Rent arrears matter too. Where half a year's rent is in arrears, a landlord may start a proceeding to recover possession without a formal demand or re-entry, though the proceeding stops if the tenant pays the arrears and costs before trial. These are the commercial-lease rules and do not apply to residential premises under the Residential Tenancies Act, 2018.

On equipment, inventory and receivables, registering a financing statement perfects a security interest, so a buyer of business assets should search the registry under the Personal Property Security Act, because a perfected interest can follow the asset. Customers buying inventory in the seller's ordinary course of business generally take free of the seller's security interest, but that protection does not extend to a buyer of the whole business or its equipment.

Tax on the deal and how you hold the business

On GST/HST, a supplier and recipient can jointly elect so that no GST/HST is payable on the sale of a business if the buyer acquires all or substantially all of the property reasonably necessary to carry on the business. It is not available where the seller is a registrant and the buyer is not. Tax can still be payable on a service the seller will render and on leases or licences.

On structure, a sole proprietor is liable to the full extent of personal assets, whether the business is a startup or a purchase. Incorporating involves Articles of Incorporation, a Notice of Registered Office and a Notice of Directors, with a fee of $300 for a for-profit company. If you buy a company, confirm it is in good standing, since a late annual return makes its status NOT IN GOOD STANDING.

Side by side, and what to do next

• Ask for payroll records, including each employee's start date.
• Ask about a tax clearance certificate from the minister, since the Crown lien for unpaid tax continues until paid or a clearance certificate is issued. How to confirm any workers' compensation amounts owing depends on your situation, so it is worth confirming with a lawyer.
• Search the personal property registry against the seller and the assets.
• Read the actual lease and get the landlord's written position on assignment.
• Check any licences or permits you need, since transfer rules vary by industry and municipality.
• If you are not a Canadian, ask a lawyer whether federal investment rules apply to your purchase.

Before you sign, have a lawyer and an accountant review the structure. It affects what you inherit, how you are taxed and how much risk you carry.

Frequently asked questions