Purchasing a business? Be sure to avoid tax liability
Be smart about purchasing a business and follow the law to avoid unnecessary tax liability.
If you are purchasing a business in the state of Michigan, you need to be aware that you may be responsible for the previous owner’s liability. This is called “successor liability.” Michigan State University Extension urges potential business buyers to learn more about successor liability by visiting the Michigan Department of Treasury website.
When you purchase an ongoing business, you must withhold sufficient funds to pay-off any outstanding tax debt obligations that the current owner may have. The seller will have to prove that all taxes are paid before you release the remainder of the money. Your best strategy is to have the current owner get a Tax Clearance Certificate (form 514) from the Michigan Department of Treasury.
You are also purchasing the previous owner’s unemployment tax liability. The current owner must provide unemployment insurance information at least two days prior to the date the purchase is accepted. Your seller must complete the Business Transferor’s Notice of Transferee of Unemployment Tax Liability and Rate, form UIA 1027, which is available online.
The seller must complete a Notice of Change or Discontinuance, form 163, to close the unemployment account.
The following checklist can be used to assist you in purchasing an ongoing business:
- Seek out a business that you want to purchase
- Gain knowledge in the industry that you will be working in
- Make a decision to purchase the business
- Obtain advise from attorney, accountant, banker and advisors
- Write “Letter of intent” to the current owner(s) indicating an offer to purchase their business
- Request all financial documents and other relevant information to complete due diligence on the company of interest
- Make a formal offer on the business and request clearance from all successor liabilities forms and documents
- Make a partial payment for the business, withholding an appropriate amount to cover any tax liabilities
- Obtain copies of all conditional tax clearance request forms 514
- Complete all required steps listed above to register the business into your own organizational structure
- Release the remainder of the withheld cash
- Take ownership of the business
The content of the items listed above is provided as a guideline and does not constitute legal advice. See appropriate council for all business related decisions.
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