Arm’s Length Transaction

Arm’s Length Transaction: What It Is and Why It’s Important

What is an arm’s length transaction?

Arm’s length transactions are legal business deals in which buyers and sellers don’t influence each other’s decisions during the transaction and make decisions independently. The term comes from the idiom “at an arm’s length,” which means to maintain distance. 

Arm’s length transactions minimize, if not eliminate, ethical concerns that come with dealing with people who have a prior business or personal relationship. 

These are a few examples of arm’s length transactions:

  • A real estate transaction between a buyer and seller who have never met before.
  • A public stock offering in which buyers and sellers are anonymous.
  • A contract between two companies that are not affiliated with each other.

Why is having an arm’s length transaction important?

Arm’s length transactions help determine a fair market price for both the buyer and seller. They impact other parties, such as banks and municipalities involved in procuring loans and paying taxes, respectively. The final agreed-upon price can influence the item’s fair market value.  Fair market value is the price at which an asset would sell in a competitive market with both buyer and seller acting in their own best interests. With an arm’s length transaction, the final price would generally be close to, but not the same as the fair market.

Arm’s length transactions have legal and tax implications for businesses. They encourage reasonable and fair business practices, like paying the correct taxes in each jurisdiction and following regulations.

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StellarFinance, Inc. does not necessarily constitute or imply its endorsement, recommendation or favoring, sponsorship, or representation in reference to any specific company, products, processes, or services by trade name, trademark, manufacturer, or otherwise in this article. StellarFinance, Inc. and its affiliates do not provide financial, tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own financial, tax, legal and accounting advisors before engaging in any transaction.