If you are contemplating buying a business in California, either by purchasing an existing business or by purchasing the assets of a business, there are many factors you must consider and evaluate before you make the deal. One of these many important considerations includes the potential exposure to liability that your business, as a successor, will face.
As is the case with many of California’s corporate laws, its laws regarding successor liability are much broader than similar laws in other states. Because this area of corporate law is complex and imposes many obligations on both sellers and buyers, it is very important to consult with an experienced attorney who specializes in the purchase and sale of businesses, asset sales, mergers, and acquisitions.
At CKB Vienna LLP, our attorneys routinely help many of our clients acquire other businesses (through a variety of mechanisms). We understand the potential risks associated with successor liability. Therefore, we take many steps to mitigate our clients’ exposure to such risks before the purchase and sale of a business takes place.
What is Successor Liability?
Successor liability refers to any liability imposed upon a successor business resulting from the debts and liabilities of the predecessor. In other words, the purchaser (referred to as a successor) may be held liable for the debts of the seller (referred to as a predecessor).
Mechanisms to Avoid Successor Liability
There are a few possible options available to business owners who wish to purchase an existing business without incurring successor liability:
The purchaser may create a separate subsidiary to purchase the business.
The purchaser may contractually shift liability to the seller by including very specific legal provisions in the purchase agreement.
The purchaser may purchase only the assets of the seller rather than the entire business. (However, this does not always prevent successor liability).
Successor Liability to the Government
Government debts (i.e., TAXES) are a major exception to the general rule that purchasers do not automatically assume the debts of the seller in an asset purchase. The purchaser (including shareholders) can find itself liable for full payment of the predecessor’s outstanding tax obligations. Therefore, it is important for the purchaser to take preventive measures to avoid being on the hook for the predecessor’s tax bills and any other government debts.
To this end, one option for a purchaser is to request a reduction in purchase price by the amount owed by the predecessor to the government. In other words, the purchaser seeks reimbursement for paying the predecessor’s government debts, which can include:
Owed contributions to the California unemployment compensation disability fund, employment training fund, and the unemployment fund, plus the amount of any penalties and interest
Income and franchise taxes, plus the amount of any penalties and interest
California sales and use taxes
In many cases, the purchaser’s decision to purchase a business may be contingent upon whether there is any successor liability for government debts, and/or the amount of any and all outstanding debt obligations.
Regardless of how a purchaser feels about outstanding tax liabilities that may exist, the purchaser must conduct due diligence and should request confirmations from all relevant government entities that the business has satisfied all debt obligations. If government debts do exist, the purchaser needs to know the accurate and up-to-date value of all outstanding debts.
Experienced Attorneys in Southern California
At CKB Vienna LLP, our attorneys specialize in helping business owners identify the risks associated with purchasing a target business, and successor liability. More importantly,we work with businesses to craft and implement various strategies to mitigate these risks.
To learn more, contact us today by calling 909-980-1040 or filling out our short online form. We have locations in Rancho Cucamonga, San Bernardino, and Los Angeles – for your convenience.