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Simple English definitions for legal terms
continuity of business enterprise
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A quick definition of continuity of business enterprise:
Continuity of Business Enterprise: A rule that applies to when one company buys another company. The buying company must keep doing the same kind of business that the other company was doing before, or use a lot of the other company's things to start a new business. This is important because it helps the buying company avoid paying taxes on the purchase right away.
A more thorough explanation:
Continuity of business enterprise is a rule that applies to mergers and acquisitions. It states that the acquiring company must continue the target company's historical business or use a significant portion of its assets in a new business to qualify for tax-deferred treatment.
For example, if Company A acquires Company B, and Company B is primarily in the business of manufacturing widgets, Company A must continue to manufacture widgets or use a significant portion of Company B's assets to manufacture widgets to qualify for tax-deferred treatment. If Company A decides to sell off Company B's widget manufacturing business and use the proceeds for a different business, the acquisition would not qualify for tax-deferred treatment.
Another example would be if Company A acquires Company B, and Company B is primarily in the business of providing consulting services. Company A could continue to provide consulting services or use a significant portion of Company B's assets to provide consulting services to qualify for tax-deferred treatment.
Overall, the continuity of business enterprise rule ensures that companies cannot use mergers and acquisitions solely for tax benefits without continuing the target company's business or using its assets in a similar business.