When selling a business, a common question is whether the company itself can pay the legal fees.
It can be tempting, particularly in an owner-managed business. The money may be sitting in the company and the transaction relates to it. But the first question is: who is actually selling?
Asset sale or share sale
It is important to establish whether the company is selling its business and assets or whether the shareholders are selling their shares. These can sound like the same thing commercially, but legally they are very different transactions.
In an asset sale, the company is the seller. It sells some or all of its business and assets to the buyer, and the sale proceeds are received by the company.
In a share sale, the shareholders are the sellers. They sell their shares to the buyer, while the company continues to own its business and assets. The sale proceeds are payable to the shareholders rather than the company.
This distinction affects the legal documents, who incurs the transaction costs and the wider accounting and tax consequences. Those consequences can differ significantly, so appropriate accounting and tax advice should be obtained when deciding on the sale structure.
What does this mean for legal fees
In a share sale, if a solicitor is advising shareholders on the sale of their shares, those legal costs will ordinarily relate to the shareholders rather than the company.
The fact that the transaction concerns the company does not, by itself, make those costs a company expense.
A company is a separate legal entity from its shareholders and directors. Directors must also consider their statutory duties when deciding how company money is used.
Their duties under the Companies Act 2006 include acting within their powers and promoting the success of the company for the benefit of its members as a whole.
Can the company incur legal costs
Yes. A transaction may also involve legal work undertaken for the company itself.
It is therefore important to distinguish between work undertaken for the company and work undertaken for the individual selling shareholders.
Where both the company and its shareholders receive advice as part of the same transaction, the scope of that work and the costs attributable to each should be identified where appropriate.
Why does it matter
Using company funds to meet costs that properly belong to a shareholder can have legal, accounting and tax consequences.
Those consequences depend on the circumstances. Appropriate accounting and tax advice should therefore be obtained before deciding how the costs will be paid and treated.
The key point
An asset sale and a share sale are fundamentally different. If the company sells its business and assets, the company is the seller. If shareholders sell their shares, they are the sellers.
Consider that distinction at the outset, together with who will incur the transaction costs. The proposed structure should also be reviewed with the company’s accountant or tax adviser so that the accounting and tax consequences are properly understood.
Getting this clear at the beginning is easier than trying to deal with incorrectly allocated costs after completion.
Advice on selling your business
If you are considering selling your business, our Business Law team in Kent can advise on the legal arrangements and transaction costs. Contact Mignonette Ellis, a solicitor specialising in corporate and commercial matters, on 01634 728122 to discuss your plans.
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