The California Franchise Tax Board recently issued a reminder notice for employers that have acquired the assets of another business, whether through purchase, transfer, inheritance, or liquidation. Regardless of means of acquisition, the successor employers are personally liable for the withholding tax liabilities, plus any applicable interest and penalties, of the predecessor business that was acquired.
The California Employer’s Guide defines a successor employer as an employer who has acquired all or part of another employer’s or predecessor’s business and continues to operate the business without substantial reduction of personnel resulting from the acquisition.
Successor liability is limited to the fair market value of the assets acquired. According to the Franchise Tax Board notice employers are required to withhold in trust a sufficient part of the purchase price or set aside in trust money or property to cover the amount of the taxes required to be withheld. This also includes any interest or penalties associated with the withholding tax obligations that are due or unpaid by the business entity or payer.
According to the Franchise Tax Board, successors of a California business or their representative, escrow officer, or title officer may submit a written request for a bulk sale certificate and fax it. The written request should include:
- Name of successor;
- Complete successor’s mailing address;
- Escrow company’s name;
- Complete escrow company’s address, phone, and fax;
- Escrow officer’s name;
- Escrow number;
- Sales price;
- Estimated closing date;
- Name of business being transferred;
- Physical address of business;
- Liquor license number, if any;
- Payer name;
- Complete payer physical address; and
- State tax account number.
Avoiding Successor Liability
A purchasing business owner in California or any other state may consider one of several options to avoid the imposition of successor liability, including:
- The owner of an existing business may create a separate subsidiary to purchase the target business. This option places the acquired liabilities in the subsidiary to avoid exposure to the parent company. This option is available only for existing companies, not new businesses, and does nothing to prevent successor liability from being imposed on the subsidiary;
- The purchasing company may include certain legal provisions in the purchase agreement which shifts liability back to the seller. This choice is feasible when the selling entity survives the purchase or when a selling company’s owners have the financial ability to compensate the purchasing entity if any predecessor liabilities arise following the sale or merger; or
- A purchasing business might also avoid the imposition of successor liability by purchasing only the assets of a target business. However, this is not a foolproof solution as discussed below.
Individuals or entities who are contemplating the purchase or merger of an existing business must be aware of the real potential for successor liability being imposed on their company following the acquisition of a business or its assets. A combination of different options can provide the best protection for a purchasing business against the imposition of successor liability. Assessing the level of risk and determining which of the strategies are ideal in any given situation should be done by a team of experts. Furthermore, M&A employment tax issues can be significantly simplified with an electronic platform that relieves employers of internal management and administrative burden, allowing them to focus on compliance.Collect, review, and analyze large amounts of data in a cost-effective manner, easily identify errors, and resolve potential issues on time by outsourcing M&A management.
Editor’s Note: This post has been updated for accuracy and comprehensiveness.Disclaimer: This article is general in nature and is not intended to replace the guidance of an employment tax expert and/or legal professional with regards to an appropriate course of action in your particular circumstances. Please consult with a professional for appropriate advice in your case. Pursuant to IRS “Circular 230” rules, any information included herewithin is not intended or written to be used for the purpose of avoiding penalties under the federal Internal Revenue Code.