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DIY Business Mistakes: Unknowingly Assuming Tax Liability in Asset Purchases

Apr 15 | 2021  by

Any good business person knows that when seeking to purchase a business, it is crucial to get a full picture of the benefits and drawbacks you are taking on when purchasing the business. A prospective purchaser will want to lessen the liability they are taking on when buying any business. Many businesses will opt for asset purchases over stock purchases for this very reason.

However, sometimes purchasers assume that by buying the assets of a business instead of purchasing the stocks, the purchaser can avoid taking on the liabilities of the business. This isn’t necessarily true and can be a common misconception. For example, in Michigan, a purchaser assumes unemployment taxes and interest due to the Unemployment Insurance Agency (UIA) if the purchaser buys 75% or more of another company’s assets and the seller’s business has an outstanding debt with the UIA. The applicable provision is Section 15(g) of the Michigan Employment Security Act, which states: 

(g) A person or employing unit that acquires the organization, trade, business, or 75% or more of the assets from an employing unit, as a successor described in section 41(2), is liable for contributions and interest due to the unemployment agency from the transferor at the time of the acquisition in an amount not to exceed the reasonable value of the organization, trade, business, or assets acquired, less the amount of a secured interest in the assets owned by the transferee that are entitled to priority.

To avoid these nasty surprises, Section 15(g) of the Michigan Employment Security Act requires two UIA forms that should be provided to a purchaser when acquiring an existing business. Form UIA 1395, called a Clearance of Account, gives a current certified statement of taxes owed to the UIA by the seller. The second form is UIA 1027, called the Business Transferor’s Notice to Transferee of Unemployment Tax Liability and Rate. This form discloses the most recent five years’ worth of issues that can affect the company’s current or future tax rates, such as missing or delinquent payments.

Unfortunately, many DIY business owners find themselves caught in this trap, often assuming they can do it on their own. Having an attorney that can navigate these requirements and make sure your business is protected means the difference between a smooth transition and a world of hurt down the line. Save yourself the headache, contact Fausone & Grysko, PLC’s experienced Corporate & Business Law team at (248) 380-0000 or Contact Us online.