The legal formalization of the sale of business

Feb, 03 2021

In the process of doing business, the business owner may face the question of selling it for one reason or another. It is worth saying that in the process of selling business it is the whole process of company’s business activities for profit that makes up the object of the deal, and not the particular property of a company. It is the entire complex of equipment, products and established business processes that is transferred during the sale.

Thus, having in mind the sale of a business, we can safely talk about the sale of the entire complex of economic activities in the form of an enterprise. According to the legislation of the Russian Federation and provisions of the Civil Code, an enterprise is usually understood as the entire complex of property that is used for business activities. This property complex can include all types of property that are intended and necessary for the full-fledged operation of the enterprise and making a profit, including the following:

  • buildings (linked to a specific place of construction, can be located on the ground or underground); 
  • equipment for work;
  • raw materials, finished products and goods;
  • rights of claim, as well as debts;
  • exclusive rights to the means of individualization.

Sale of share in the authorized capital

In addition to the sale of the enterprise, there is also a second option for alienating business – conclusion of a contract for the purchase and sale of a share in the authorized capital. This option is simpler and more common. As a result of entering into such a transaction, company’s members change. 

To do this, all necessary changes are made to the constituent documents, after which the document is subject to mandatory state registration. Thus, the main method of purchase and sale of share of an LLC (JSC) provided for by law is a contract for the purchase and sale of share.

The sale of share in the authorized capital of a legal entity (a limited liability company or a joint-stock company) is regulated by the relevant federal laws: 

  • Federal Law No. 14-FZ of 08.02.1998 “On Limited Liability Companies”;
  • Federal Law No. 208-FZ of 26.12.1995 “On Joint-Stock Companies”.

Legislation of the Russian Federation prescribes that conclusion of a transaction for the purchase and sale of share in the authorized capital of a legal entity is subject to notarization. A notary will help to draw up all the necessary documents, certify them, and will also be able to submit the entire set of documents to the tax authority via electronic communication channel. 

After that, tax authority will make appropriate changes to the register of legal entities. From this moment on, the buyer of the business becomes a full participant of the legal entity with all rights and obligations that follow from this.

That is, after signing all the papers, registering with the state and tax authorities, the entrepreneur will independently conduct business, make profit, and submit all necessary accounting documents and tax returns. Entrepreneur bears responsibility and risks himself for improper performance of these duties.

So, the entire process of legal registration of the sale of business can be divided into several stages. First of all, it is necessary to find a buyer for the business. After such a person has already been found, it is recommended to check the acquirer from a legal standpoint for his good faith, but this is not necessary. 

Preparing the company for sale

It should also be borne in mind that legal registration of the sale of business is preceded by a full-fledged preparation of the enterprise for alienation. This process, in particular, includes preparation of all necessary documents that confirm the legality of company’s activities and absence of problems in legal relations with state authorities. If necessary, a third-party professional auditor is involved, who conducts such an audit and provides the results to the customer in full, vouching for the reliability.

In addition to the above documents, the owner of the sold enterprise should prepare a balance sheet that contains the financial performance of the company and reflects the book value of the business. The balance sheet will allow the potential buyer to get acquainted with the financial condition of the company as a whole, to assess the accounts payable and receivables, as well as to analyze the current state of affairs of the company.

The buyer of the business should also check the acquired company for other risks, which, for example, include participation in legal proceedings. It is not difficult to check this aspect, since all the necessary information is contained in open electronic systems. Transparency of the business and all its indicators is the key to the successful conclusion of the purchase and sale of the company. Thus, both the seller and the buyer of the company should focus on the issue of company’s legal verification.

Choosing a way to sell business

The next stage of selling business implies that the parties choose the appropriate method of sale. In this case, the choice depends on number of founders of the legal entity, financial capabilities of participants in the transaction.

Once a specific method of sale is selected, it is necessary to draft and conclude an appropriate contract that reflects both the interests of the buyer and the seller, as well as securing a number of guarantees to avoid potential risks in future. It is extremely important to define in detail in the contract all the terms and conditions of the transaction (including the essential ones, without which the contract will be invalid) and specify what exactly is its subject.

Negotiation over the cost of a business purchase and sale transaction

Special attention should be paid to the approval of the final cost of the company. The following factors should be taken into account when pricing:

  • company’s monthly profit;
  • “age” of the company – buyers tend to be more attracted to companies that have been registered for a long time, which have a history and reputation among customers;
  • value of tangible and intangible assets.

It is also especially important for the buyer to obtain from the seller of the company all the constituent documents, seal, accounting, contracts and personnel documents.

Business sales and taxes

The legal formalization of the sale of business is closely related to the so-called tax consequences. As a general rule, when selling shares, individuals pay a tax on the income of individuals at the rate of 13%. If you are a tax resident of the Russian Federation, that is, you live in the country for more than 183 days a year, you can make a property deduction. 

When selling shares, a legal entity will be required to pay income tax at the rate of 20%. To determine the tax base, the purchase price and transaction costs must be deducted from the proceeds from the sale of share. For example, the services of a notary.

Nevertheless, there are several ways to optimize the tax burden when entering into a business purchase and sale agreement, which can be consulted in more detail by a professional in the field of tax law. It is worth seeking help from a narrow specialist who has information in the field of tax law and is a practicing lawyer.

Thus, the legal registration of the sale of business should be accompanied by a professional, whose help is an integral part of the issue. It is the lawyer who will help to choose and design the most optimal way of selling business that will meet the interests of all parties to the transaction, warn of the risks, will draft a civil contract in compliance with all legal requirements, will also make a number of other actions that will allow to successfully carry out a sale of business without any negative consequences.

Author of the article

The legal formalization of the sale of business
Kirill Chemlaev
Senior Lawyer

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