A Business Planning Guide to Successor Liability Laws

Before a purchaser buys either all or substantially all of the assets or stock of a business, the purchaser needs to ensure that it is not also acquiring that business's old tax troubles. Under the laws of most states, the purchaser can, in fact, be held personally liable for up to either the purchase price or sometimes the entire amount of the seller's unpaid state tax liabilities until those liabilities are extinguished. Thus, a purchaser that is unaware of the applicable state successor liability statutes and that does not perform the proper due diligence regarding the seller's state tax history may well incur personal liability for the seller's unpaid state taxes and, in many cases, for the related penalties and interest.

Most states impose some form of successor liability by statute and generally identify the types of taxes to which that liability attaches. Likewise, most states prescribe procedures for purchasers to avoid successor liability by instructing the purchaser to notify the relevant tax authority of the transaction details, request tax clearance regarding the seller's tax history, and withhold money from the purchase price for the unpaid taxes pending clearance by the tax authority. With sufficient advance planning, a purchaser can determine whether a particular state tax jurisdiction has enacted some form of successor liability statute for particular tax types and identify the applicable procedures for minimizing or eliminating the risk of such liability before closing the acquisition.

Although each state's laws governing successor liability are unique, there are some trends among them. As of this writing, approximately 40 states have enacted some form of successor liability statute.

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[A} detailed summary of each state's approach to successor liability on the sale or transfer of a business within that state [follows]. The summaries are based on the relevant state rules, regulations, and court decisions, as well as informal and nonbinding discussions with representatives of the state tax authorities.

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Lexis.com subscribers can access state-by-state analysis of Alabama - Mississippi by viewing: A Business Planning Guide to Successor Liability Laws, Part 1

Lexis.com subscribers can access state-by-state analysis of Missouri - Wyoming by viewing: A Business Planning Guide to Successor Liability Laws, Part 2