Tuscarawas County Auditor’s Office
New Business Guide
Purchasing an Existing Business
PURCHASING AN EXISTING BUSINESS
Many individuals who seek to begin a business choose to purchase one that is already operating. The culmination of many years of work for some businesses is to sell their existing operation and/or assets to another. Many business owners find that proper planning in the purchase of a business, both from the buyer and the seller’s perspective, can greatly limit tax liabilities. The method under which you choose to form your business and complete the transaction can have lasting effects for many years. You should seek out the advice of legal counsel before signing contracts and we would suggest at a minimum that you review the issues surrounding a purchase of a business with a qualified business advisor or consultant. Major issues to note about a purchased business are as follows:
- Personal property returns B An initial, informational return should be filed by the new business even if the predecessor company was filing returns. It is also a good idea to verify that the business has been filing returns timely with the Auditor’s office, and in the first annual return which is filed, the new taxpayer must indicate who reported the taxable property in the previous tax year. A prior year certificate of compliance can be obtained by the owner as proof of filing and payment.
- Vendor’s License & Sales Tax B A purchased business should already have a vendor’s license, but the new owner is required to obtain their own vendor=s license for the business. The seller can opt to cancel the old vendor license once there are no longer taxable sales. It is also a good idea to review sales tax practices of the old company as well as verify that the business has been filing and remitting sales taxes to the State of Ohio.
- Worker’s Compensation B If the business has employees, the owner should have Worker’s Compensation coverage and the certificate of coverage should be posted somewhere on the owner’s premises. Checking the history of such claims and that all payments are current should be a priority.
A Special Note about Retirement Options – One of the biggest issues needing addressed when choosing a form of entity is the type of retirement plan(s) the entity seeks to have in place, either now or in the future. Certain types of retirement plans are limited to certain entity types, and this discussion is far too in depth to explain in this Guide. We suggest you contact a tax advisor or retirement expert in regards to these issues and entity types.
SPECIAL NOTE REGARDING LUMP-SUM PURCHASES
Buyers and sellers often purchase businesses for a >lump sum = price and do not list the assets being bought and sold in the contract documents. There are sometimes intangible assets purchased such as goodwill, and non-compete agreements. The Internal Revenue Service has a form that outlines the allocation of the purchase price known as Form 8594, Asset Acquisition Statement. This form is prepared by the BUYER and must be delivered to both the seller and the IRS. The form is often reviewed by the Ohio Department of Taxation in personal property tax audits to determine the initial values of tangible equipment and inventory. Form 8594 is attached in the appendix to this guide. We strongly encourage anyone purchasing a business to consult with an attorney or tax advisor as to whether or not you are required to file the form and in its preparation.
SPECIAL ITEMS FOR THE PURCHASER
The single, most common error in the purchase of a business by the purchaser is to presume that to save money and time, you don’t want to use a professional to review the business that you are buying. Many new owners come across serious contract problems or find that they are stuck with a business having many outstanding debts of which they weren’t aware when they bought the business. This is a fatal mistake. We strongly suggest that anyone looking to purchase a business consult with an attorney or other professional. Here are some questions you might want to ask when reviewing a company you might plan to purchase:
- Is the business I am buying in good standing with all tax authorities?
- Does the business owe vendors or tax agencies for debts I might have to pay after I purchase the business?
- Can the business produce financial statements which I can have reviewed by a professional?
- Will the seller give me a list of references and business contacts?
- Does the exiting owner have a problem with me consulting the Better Business Bureau?
- Is the existing owner willing to sign a non-compete agreement as a part of the purchase?
These are only some of the questions you might want to ask the prospective seller of a business.
All information is non-inclusive. Review these items with a trained professional.