How Is Successor Tax Liability Handled When Buying a Business?

 Posted on October 16, 2019 in Small Business Taxes

Making the decision to purchase an existing business can be an exciting and lucrative endeavor. Owning your own business allows you to have a great deal of independence and direction over how the business is run. Being your own boss and watching a business grow and develop can be especially rewarding. Of course, buying a business is not without risk. One of these risks is successor liability for any debts owed by the business, including tax debts.

Stock Purchase Versus Asset Purchase

When you buy an existing business, you have two options: an asset purchase or a stock purchase agreement. A stock purchase allows you to buy most of the seller’s shares, or in the case of an LLC purchase, the membership units. However, assets such as equipment and inventory are still owned by the entity. If you acquire a business through a stock purchase, you will most likely assume all of that company’s liabilities.

In an asset purchase agreement, you purchase the business’s assets, and the seller retains ownership of the actual business. In most asset purchases, the assets are transferred to the new owner without liabilities, but there can be exceptions. Most people buying an existing business choose to undergo an asset purchase transaction to avoid assuming debts accumulated by the previous owner. A qualified attorney can help you decide what type of business purchase agreement is right for you.

Understanding and Avoiding Successor Liability

There are some situations in which a person who buys a business can become responsible for the seller’s liabilities and debts even in an asset purchase deal. You may be liable for the seller’s debts if one of the following conditions is true:

• You are buying assets from another entity that you also own.
• There is an agreement, either expressed or implied, regarding the assumption of the seller’s liabilities.
• The purchase is part of a merger or de facto consolidation.
• The deal is only intended to help the seller fraudulently avoid responsibility for debts.

In order to avoid being held responsible for the seller’s obligations, great care should be taken in drafting the asset purchase agreement so that it clearly states that you are not assuming any of the seller’s liabilities. Do not allow the seller to dissolve the business entity for a specified period of time after the deal. You may also want to ensure the seller carries insurance regarding pre-closing liabilities. Lastly, make sure to perform thorough due diligence and be wary of any products or practices that could lead to post-closing liability.

Contact a San Jose, CA Business Tax Lawyer

If you are planning to purchase a business, you will want to be sure to understand your responsibility regarding the debts owed by the business, including any tax liabilities. For help addressing successor liability and other business tax issues, contact the experienced San Jose tax liability attorney at John D. Teter Law Offices for help. Call our office at 408-866-1810 to schedule a confidential consultation to discuss your questions and concerns.

Sources:

http://www.pennstatelawreview.org/116/3/116%20Penn%20St.%20L.%20Rev.%20913.pdf

https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-navigating-successor-liability-risks-in-asset-deals