What Is Arm’s Length?

by Greg DePersio

1 min read

Arm’s length refers to a transaction or sale that occurs when the person you are doing business with is not closely related to you or your company. This type of transaction is important to know because the two parties involved change the entire situation of a transaction. An arm’s length transaction between two unrelated parties is very different from a transaction between two family members.People outside of your company usually want to know your business acts at arm’s length for a few reasons. It tells others you entered into an agreement without being forced into the deal. An arm’s length transaction is done when you act in your own self-interest, were not under duress, and have the best interests of the company in mind. Letting others know you operate under this concept shows your business is not colluding with any other person or business.External parties including creditors, tax authorities, and auditors are highly interested in making sure arm’s lengths dealings occur. Banks must make sure you are operating your company in their best interest; taxing authorities track arm’s length transactions to make sure the appropriate amount of tax is applied to goods that have been transferred or sold; and auditors assess your company to make sure the financial information you present is valid and the internal controls you have in place are working. This includes correctly accounting for dollar amounts of transactions.

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