JCSM Shareware Collection 1996 September/JCSM Shareware Collection (JCS Distribution) (September 1996).ISO/bother__/sba954.zip/F220.SBE

Text File | 1995-11-05 | 11KB | 226 lines

@141 CHAP 3

        ┌───────────────────────────────────────────────┐
        │    CLOSING THE DEAL -- TAX CLEARANCES AND     │
        │    OTHER LEGAL REQUIREMENTS ON BUY OUTS:      │
        └───────────────────────────────────────────────┘

The legal procedures involved in buying an existing busi-
ness can be quite complex.  Even if you are the most self-
reliant do-it-yourselfer, you should, in this particular
situation, be sure to seek out the services of a competent
business attorney to represent you.  In order to ensure
that you are protected under the law as fully as possible
from liabilities you have not agreed to assume, you should,
at a minimum, have your attorney take care of the following
items in connection with the purchase:

    1. Review the structuring of the deal, including the
actual sale agreement documents.  (If your attorney is not
a tax specialist, it would also be wise to have a tax ac-
countant review the terms of the agreement and advise you
on possible ways to structure it better for tax purposes.)

    2. Comply with the local Bulk Sale or Bulk Transfer
Act.  In many states, the buyer of a retail or wholesale
establishment or certain other types of businesses must
prepare a "Notice to Creditors of Bulk Transfer" and, us-
ually, file it in counties where the business operates
and also publish it in a general circulation newspaper
prior to the purchase of the business.  If this is not
properly done, the seller's unsecured creditors may be
able to "attach" the property that you thought you were
buying free and clear.

@CODE: AK AR CO CT FL ID IL IA KS KY LA ME MN MS MT NB NV NH NM ND OR PA SD TX VT WA WV WY
NOTE:  The bulk sales laws are now generally considered
to be a 19th century anachronism, an unnecessary burden
on buyers of businesses, and of very limited benefit to
creditors or anyone else.  Thus, since 1988, many states
have repealed their bulk sale laws entirely, including
@STATE.

@CODE:OF
@CODE: MS
[The Mississippi bulk sale law is repealed, effective as of
July 1, 1995.]

@CODE:OF
    3. Check for recorded security interests or liens.  Be-
fore closing the purchase, your attorney should check with
the appropriate state office (usually the Secretary of
State) to determine whether anyone has recorded a "security
interest" (a lien or chattel mortgage) against the personal
property of the seller's business. For a fee, the Secretary
of State's office will generally provide a listing of any
security interests that have been recorded as a lien
against the assets of the business you are buying.  Also,
if the transaction involves a purchase of real property,
you will also have to have a title search performed to see
if the seller has good title and if there are any recorded
mortgages or other claims against the property that the
seller has failed to disclose to you.

    4. Check on various state tax releases, including state
employment taxes, sales and use taxes, and, if you are ac-
quiring an incorporated business, you may also need to ob-
tain tax releases for corporate income or franchise taxes,
as well.  Most states require you, as buyer of an ongoing
business, to obtain one or more such tax releases, certify-
ing that no delinquent taxes (of the various kinds indica-
ted) are owed to the state by the seller.  Otherwise, if
you fail to withhold any such taxes owed by the seller from
the purchase price, the state will be able to look to YOU
for payment of such taxes, and you will have to try to get
indemnity from the seller, who may by then be in Brazil
or relaxing on the Riviera, enjoying your money.  Your
agreement of sale should, therefore, be conditioned on the
seller first obtaining certifications or releases from all
appropriate taxing agencies showing that the seller is not
in arrears on any kind of taxes.

    5. Review the terms of any important contracts, such as
leases, that the seller is assigning to you, to make sure
that such assignment is possible under the terms of such
contracts, without any detriment to you.  Similarly, if you
are acquiring a business in certain kinds of regulated in-
dustries, particularly relating to food, health, or liquor
sales, make sure that proper legal steps are taken to trans-
fer any federal, state or local licenses to you--otherwise,
you may not be able to operate the business you have bought!

    6. Look for environmental problems, and ways to protect
you from them.  If the deal involves acquisition of real es-
tate, or of a corporation that previously owned real estate
during its history, be aware that you may be subjecting
yourself to virtually unlimited liability, far beyond the
value of the property, if the the property is contaminated
by hazardous waste substances, under the federal Superfund
legislation.  Thus, have your attorney include appropriate
indemnity provisions in the agreement, in case such prob-
lems come to light after the purchase.  However, this is
only a partial protection, since being entitled to indemni-
ty and actually collecting it are two different things, as
the seller may be long gone or broke by the time the EPA
jumps down your throat, requiring you to spend astronomical
sums to clean up the toxic waste on the site.  Thus, you
should also have an environmental consultant do soil sam-
ples or other testing to attempt to determine if such con-
tamination exists; or, in some cases, you should even in-
sist upon having an "environmental audit" done before the
transaction is consummated.  In either case, you are much
less likely to be held liable if a hazardous waste problem
later shows up, if you can show you did "due diligence"
(hiring experts, etc.) before acquiring the property, and
that no problem was evident to experts at the time.

Finally, note that in most states, you have only 90 days or
so after acquiring an ongoing business to apply for the
right to succeed to the seller's unemployment tax experi-
ence rating, if you desire to do so.  If the seller had a
low experience rating, this may save you quite a bit in
state unemployment taxes, since you will be able to "in-
herit" the seller's lower tax rate, as a "successor em-
ployer," rather than pay the regular unemployment tax rate
that applies to a new employer.  Be sure that you don't
miss the deadline for making any required election to adopt
the seller's experience rating.

@CODE: CA
@CODE:NF

     ┌─────────────────────────────────────────────────────┐
     │CALIFORNIA LEGAL REQUIREMENTS--PURCHASE OF A BUSINESS│
     └─────────────────────────────────────────────────────┘

State law requirements that your attorney needs to see to
if you are acquiring a business in California include the
following:

   .  BULK SALE LAW.  For many types of business that sell
      from stock, a sale of personal property (inventory,
      equipment) in other than the ordinary course of busi-
      ness, either by auction or conducted by a professional
      liquidator, or constituting over half of such seller's
      assets of that type, may be considered a "bulk sale"
      under California law.  If so, you, as the buyer, must
      prepare a notice to creditors of the bulk transfer and
      file it at least 12 days before the sale with the
      county recorder in the appropriate county or counties.
      The notice must also be published in a general circu-
      lation newspaper in the judicial district where the
      property is located and in the judicial district in
      which the seller's main California office is located,
      also 12 days before the transfer, under the California
      Commercial Code.  Notice must also be given to county
      tax assessors in all affected counties, and may need
      to be accompanied by a final personal property tax
      return if filing between certain dates.  Other, special
      requirements may also apply to certain bulk sales of
      not more than $2 million, where substantially all the
      consideration is in the form of cash or a promise to
      pay cash.  Bulk sale law requirements are very complex
      and technical, so consult a business attorney to deter-
      mine whether the bulk sale law applies, and, if so,
      what you must do to comply with it, in order to pro-
      tect yourself against creditors of the seller who
      don't get paid and who may come after you if you fail
      to dot the "i's" and cross the "t's."

   .  RECORDED SECURITY INTERESTS.  Check for the existence
      of any recorded security interests on personal proper-
      ty of the seller's business with the Secretary of
      State's office in Sacramento.

   .  EMPLOYMENT TAX RELEASE.  You should require that the
      seller of the business obtain a "Certificate of
      Release of Buyer" (Form DE 2220) from the California
      Employment Development Department certifying that
      all employment taxes have been paid by the seller.

   .  SALES TAX RELEASE.  Similarly, you should require
      that the seller obtain a "Certificate of No Tax Due"
      from the state Board of Equalization, verifying that
      all California sales and use tax payments have been
      made by the seller.

   .  FRANCHISE TAX CLEARANCE.  If you are acquiring a cor-
      poration, require the seller corporation to obtain a
      tax clearance certificate from the Franchise Tax
      Board, certifying that all state of California fran-
      chise taxes have been paid by the corporation.

   .  ALLOCATE SALES PRICE TO MINIMIZE SALES TAX.  In Cali-
      fornia, unlike most states, much of the purchase
      price of acquiring the assets of a business is typi-
      cally subject to sales tax to the extent that the
      sale includes tangible assets such as furniture,
      equipment or machinery (but inventory will usually
      be exempt, if it is purchased for resale).  Thus,
      you and the seller may be able to reduce the sales
      tax on the transaction by allocating (within reason)
      more of the purchase price to inventory (or to real
      property or intangible property) and less to equip-
      ment and machinery, in your agreement of sale.

   .  EXPERIENCE RATING.  Check to see if the seller's
      experience-based unemployment tax rate is less than
      the new employer rate of 3.4%.  If it is, you will
      want to file E.D.D. Form DE4453 within 90 days after
      the business changes hands, in order to succeed to
      the seller's unemployment tax reserve account (and
      tax rate).

   .  REPORT CHANGE OF OWNERSHIP OF REAL ESTATE.  If you
      are purchasing a business that owns real property in
      California, you must report the change of ownership
      to the county tax assessor on a timely basis.  Note
      that this will trigger a reassessment of the property
      at its current value, rather than the usually much
      lower "Proposition 13" value on which the seller's
      property tax was based.  Thus, you will pay much more
      real property tax than the seller did on the same
      property, in most cases.