Successor Liability Issues When Acquiring a New Business

An important due diligence practice point for individuals and companies purchasing businesses in Texas, including assets, goodwill, or actual interest in the company is successor liability for state sales taxes.  Almost all states have successor liability statutes that impose certain pre-closing state tax liabilities on the buyer of a business.  The Texas version of this concept is found in Section 111.020 of the Texas Tax Code and reads as follows:

(a) If a person who is liable for the payment of an amount under this title sells the business or the stock of goods of the business or quits the business, the successor to the seller or the seller’s assignee shall withhold an amount of the purchase price sufficient to pay the amount due until the seller provides a receipt from the comptroller showing that the amount has been paid or a certificate stating that no amount is due.

(b) The purchaser of a business or stock of goods who fails to withhold an amount of the purchase price as required by this section is liable for the amount required to be withheld to the extent of the value of the purchase price. . . .

The impact of Section 111.020 is that if a buyer acquires a “business” it can become liable to the State of Texas for up to the full amount it pays for the business (i.e., for a total outlay of double the purchase price, once to the seller and once to the State). The assumption of debt is counted in the total price paid as well as the fair market value of any assets paid in-kind.

The determination of what constitutes a “business” is very fact specific, but the Comptroller’s Rule 3.7 (d) […]

General Discussion of Entity Formation Options

Limit Your Liability

Without a legal entity, you are operating as a proprietorship, the oldest form of business. A proprietorship can only have one owner, although husband and wife are considered one for this purpose.

If you upset someone, fail to allegedly pay a creditor or vendor, they can come after you personally—which is not a good thing. Although, there are circumstances where creditors can pierce the corporate veil, but this usually requires proof the entity is undercapitalized, underinsured, or otherwise not a commercially reasonable separate entity. With or without an entity, consider buying insurance, including general liability, products liability, employee fidelity, workers’ compensation, unemployment insurance, etc.—it’s all very, very difficult if not impossible.

In other words, to conduct business prudently and responsibly, you need a legal entity.

Partnership Formalities

A partnership can be formed with a handshake, but write it down, as oral agreements often foment serious disputes. With a general partnership each partner has personal liability. A limited partnership has one or more general partners, and one or more limited partners. Limited partners might lose their investment, but their other assets are not at risk. You can even get around the general partner’s unlimited liability by having a corporation (or another entity like an limited liability company) serve as the general partner. To get the benefits of limited partnership treatment, you must file a certificate and pay relevant state fees. Furthermore, if limited partners make day-to-day business decisions, they can wind up with general partner liability. So you may want to consider an a limited liability company (see more below for limited liability companies).

LLCs Are Very Flexible

By far, the most flexible business entity is a limited liability company, commonly referred to as an LLC. Adapted originally from […]

Recommendations for Retail Businesses Facing a Sales Tax Audit by the Texas Comptroller of Public Accounts

Recently, more audits of retail businesses have taken place throughout Texas.  One of the most common problems small retain businesses that are going through an audit face, is lack of proper record keeping.  Although most  retail businesses should have proper documentation on its daily sales, some do not have adequate accounting source documents and procedures to withstand a Texas Comptroller audit of its sales and use taxes. Bajaria Law routinely assists clients with audits for businesses in the Houston, Dallas-Fort Worth, and Austin metropolitan areas, including suburbs such as Plano, Sugarland, Katy, Stafford, Richardson, Arlington, Irving, and Garland.

To prepare and come out ahead of an audit, a retail business should at least have the following procedures and accounting tools in place:

1.  Daily, weekly and monthly cash sales journal;
2.  Cash register use of z tapes and backup of daily z tapes either electronically or on paper;
3.  Detailed journal of purchases of beer, cigarettes, and other purchases from ite vendors;
4.  Matching bank deposit slips to daily sales journal;
5.  Correct monthly, quarterly and yearly reporting to Texas Comptroller;
6.  Proper accounting and remittance of sales taxes collected and remitted to the Texas Comptroller;
7.  Reconciled ledgers; and
8.  Proper financial reporting in place, including profit & loss statements, balance sheets and statement of
cash flow.

If you are facing a Texas Comptroller Audit of sales and use tax, or local tax, contact an experienced Texas Comptroller sales and use tax attorney at Bajaria Law Firm, PC.

Please visit the following links for additional information:

Texas Comptroller of Public Accounts

Bajaria Law Firm, PC Services