- A corporation is its own legal entity, separate from the people who own it.
- Outstanding or unassessed tax liabilities, including unremitted source deductions or HST from before you owned the company, generally remain the corporation's problem — and now yours.
- Before signing, a thorough buyer — with legal and accounting help — typically reviews: - [ ] Corporate records and the minute book - [ ] Financial statements and tax filings - [ ]…
When you buy a business by purchasing its shares, you are not buying a shopping list of equipment and contracts — you are buying the corporation itself, with everything attached to it. That includes the liabilities the buyer inherits in a share purchase, whether or not anyone mentioned them during negotiations.
This catches new buyers off guard more often than almost anything else in a business purchase. A seller can be entirely honest and still not know about a tax reassessment working its way through the system, a former employee's unfiled complaint, or a lien registered years ago against equipment nobody remembers financing. In a share purchase, all of it generally comes with the company.
This article walks through what actually transfers in a share deal, how buyers typically find out about it before closing, and the contract tools that allocate the risk once a deal is signed.
Why Buying Shares Means Buying the Whole History
A corporation is its own legal entity, separate from the people who own it. When you buy its shares, the corporation itself does not change — only who controls it does. Every contract, licence, obligation, and liability that corporation carried the day before closing is still sitting inside it the day after.
That is very different from an asset purchase, where the buyer and seller each identify specific assets changing hands and specific liabilities, if any, the buyer agrees to assume. In a share purchase, there is no such itemized list for liabilities — you get the corporation, warts and all, unless the purchase agreement carves something out through price, indemnities, or a pre-closing reorganization.
Categories of Liability That Can Come With the Company
- Tax exposure. Outstanding or unassessed tax liabilities, including unremitted source deductions or HST from before you owned the company, generally remain the corporation's problem — and now yours.
- Litigation. Lawsuits or regulatory complaints against the corporation, whether already filed or just threatened, stay with the corporation you now control.
- Employment liability. Unpaid wages or vacation pay, exposure tied to how past terminations were handled, and the corporation's workplace-safety claims history all travel with the entity.
- Environmental liability. Contamination or compliance issues tied to property the corporation owns or operates can remain the corporation's responsibility regardless of who now owns its shares.
- Product and service liability. If the business sold goods or services before closing, claims arising from that activity are generally claims against the corporation — meaning against you, as its new owner.
- Undisclosed security interests. Liens or security registrations against the corporation's equipment, inventory, or receivables do not disappear just because ownership changed hands.
- Contractual exposure. Breach-of-contract or warranty claims from the corporation's customers or suppliers for work already done follow the same rule.
None of this means a share purchase is a bad idea — it is a common and often tax-efficient way to buy a business. It just means the risk profile is different from an asset purchase, and needs to be managed differently.
Due Diligence: Finding Problems Before You Own Them
Before signing, a thorough buyer — with legal and accounting help — typically reviews:
- [ ] Corporate records and the minute book
- [ ] Financial statements and tax filings
- [ ] Material contracts and leases
- [ ] Employee records and compensation obligations
- [ ] Intellectual property ownership
- [ ] Licences and permits needed to operate
- [ ] Litigation history, active or threatened
- [ ] Environmental matters affecting owned or leased property
- [ ] Insurance coverage
- [ ] Outstanding liens or security registrations
Due diligence does not catch everything — some liabilities genuinely are unknown even to the seller. That is exactly why the purchase agreement itself needs to do more work.
Contract Tools That Share the Risk
- Representations and warranties. The seller states, as a contractual matter, that certain things are true — no undisclosed litigation, taxes filed and paid, and so on — qualified by a disclosure schedule.
- Indemnities. If a representation turns out to be false, the seller agrees to compensate the buyer for the resulting loss.
- Holdbacks or escrow. A portion of the purchase price is held back for a defined period after closing, giving the buyer something to draw against if a hidden liability surfaces.
- Price adjustments. Purchase price is often adjusted through a working-capital mechanism, comparing an estimated closing position to the actual position once the numbers are finalized.
Share Purchase vs. Asset Purchase, at a Glance
| Share Purchase | Asset Purchase | |
|---|---|---|
| Historical liabilities | Generally come with the corporation | Generally stay with the seller unless expressly assumed |
| Litigation exposure | Follows the corporate entity | Buyer chooses what, if anything, to assume |
| Contracts and licences | Usually stay in place automatically | Often need third-party consent to transfer |
| Main buyer protection | Representations, warranties, indemnities, holdbacks | Careful drafting of what's assumed and excluded |
Frequently asked questions
If the seller didn't know about a liability, am I still stuck with it?
Generally yes, in a share purchase — the liability belongs to the corporation regardless of who knew about it. This is exactly why representations, warranties, and indemnities in the purchase agreement matter, since they can shift the financial consequence back to the seller even where nobody deliberately concealed anything.
Does a lower purchase price protect me instead of doing due diligence?
Not reliably. A discount reflects the buyer's general sense of risk, but it doesn't create a specific legal remedy if a particular liability later turns out to be far larger than anyone assumed. Diligence and contractual protections work together with price, not as a substitute for it.
Can I ask the seller to clean up known problems before closing?
Yes — this is common. A purchase agreement can make closing conditional on the seller resolving specific issues, or can set aside part of the price in a holdback tied directly to a known risk.
Is an asset purchase always the safer choice?
Not always. Asset purchases avoid inheriting the seller's general corporate history, but they come with their own complexities — like needing consents to transfer contracts and leases — and they are not always the more tax-efficient structure for the seller, which can affect price and deal terms. Which structure makes sense depends on your specific transaction.
This is a business purchase or sale question
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