Purchasing a Business/Successor FAQs
In this article
- I am buying another Colorado business. Do I need to set up a new entity?
- Will the employees receive 2 sets of W-2 Forms?
- Should the employees transferring complete new paperwork such as W4's and I9's?
- What happens to the employee's benefits?
- As a purchaser of a business, would I be liable for any prior FLSA violations of the seller?
- As a purchaser, am I liable for sales tax or use tax on the purchase of the business?
- How do I notify the State of Colorado of the business purchase/acquisition?
- What if I don't want to be considered a successor?
- What liability does the successor inherit from the predecessor in terms of payroll tax liabilities?
- What benefit if any does a successor gain in terms of payroll taxes?
- What about medicare wages?
- What about employee annual limits on 401K's, HSA's or other items?
I am buying a another Colorado business, do I need to set up a new entity?
Most purchases of businesses are asset purchases rather than stock purchases. Under an asset purchase; a new entity must be established with the Colorado Secretary of State, a new EIN with the IRS, and new Colorado wage withholding, sales, and unemployment accounts established.
Will the employees receive 2 sets of W-2 Forms?
Under an asset purchase, the employees will receive a W2 from the old entity/EIN and the new entity/EIN. The same would apply if an organization were to reorganize under a new entity/EIN mid-year (sole-proprietor changes to s-corporation for example).
Should the employees transferring complete new paperwork such as W4's & i9's?
Yes, under an asset purchase technically the employees are terminated from the seller & hired again by the purchaser and the purchase may wish to obtain paperwork from all retained employees to insure complete documentation is on file just as they would any new hire.
What happens to the employee's benefits?
Employers offering health, 401K, AFLAC or other benefits should consult with their broker prior to close to insure transition of benefits is smooth. Any prior Time Off balance liabilities should be discussed prior to the purchase to determine if successor should inherit or if the predecessor should pay out as part of the employee's technical termination by the seller. See SHRM for more tips.
As a purchaser of a business, would I be liable for any prior FLSA violations of the seller?
As a purchaser am I liable for sales tax or use tax on the purchase of the business?
Yes, see below taken from CO Dept. of Revenue Publication General 15:
"A buyer of business assets is also liable for sales tax on any tangible personal property acquired in the business purchase transaction. The buyer must file and pay the sales tax within 20 days after the close of his first business accounting period (or month if accounting period is a calendar month) if the purchaser has a sales tax license. Sales tax is due by the 20th day of the month following the purchase date if the purchase does not have a sales tax license (use retail sales tax return form DR0100A). Any assets purchased sales tax free from other sources may also be subject to consumer use tax (see publication FYI Sales 74 for more information)."
How do I notify the State of Colorado of the business purchase/acquisition?
The new business/entity will be required, generally in the first 30 days, to create new account(s) with the Colorado Dept. of Revenue and/or Department of Employment & Labor . Successors will be required to apply by paper forms (not online) and while completing the wage withholding/sales tax and/or unemployment applications the pertinent information regarding the previous business will be requested from the agencies (if properly completed). The agencies also may request information such as a copy of the Bill of Sale. In Colorado, the new entity should inherit the unemployment insurance history & experience rating from the predecessor. This could be favorable if prior entity has a surplus balance of UI funds and/or the purchase is mid-year and UI premiums had already been paid.
What if I don't want to be considered a successor?
In general terms, it isn't an option or something to request so to speak. The rules that govern when a successor relationship is determined are based on state law & court battles. The Colorado Dept. of Employment in particular monitors new applicants closely to fight against "SUTA Dumping". If being labeled by these agencies as a successor to another business is of particular concern to you, we suggest you seek legal counsel to help you during the establishment of your business and the State application process. In addition, if being a successor is in your favor you should also monitor the application process closely to insure you were granted the experience rating you anticipated.
What liability does the successor inherit from the predecessor in terms of payroll tax liabilities?
Another reason to seek legal counsel; but In Colorado we have witnessed instances where a successor entity was left holding the bag in terms of unpaid UI tax balances of a predecessor. A purchaser may wish to request proof from the seller supporting the entities standing with all tax agencies including the Colorado Dept. of Employment & Labor -- Have all prior UITR's been filed & paid, what does the entity's benefit charge history/balance look like, what is their current year UI rate, what will future rates look like?
What benefit if any does a successor gain in terms of payroll taxes?
A predecessor's UI experience rating as noted above may work in their favor considering new employer UI rates. In addition, a the successor can use prior wages paid by predecessor for reaching annual wage bases. This allows the new employer to pick up where the prior left off in terms of Federal Unemployment, State Unemployment and Social Security taxes which have annual limits.
- Example: Prior to closing of the sale; predecessor paid taxable wages to John Doe equal to $20,000.00. With the Fed UI wage limit at $7,000 & Colorado wage limit at $12,200; predecessor has already met all UI tax liabilities for John Doe. Thus, successor would not have to pay any additional federal unemployment or state unemployment taxes for any future wages paid to John Doe for the remainder of the year. All future wages in the current year paid to John Doe would be reported by successor as excess wages. The same principles of limits would apply to the Social Security wage limit should it be reached.
What about medicare wages?
Medicare taxable wages are calculated at 1.45% for both employer and employee. Once an employee has medicare wages over $200,000 then the employee incurs an additional tax calculation of .9% (no additional employer tax required). Successors will need to properly link prior taxable wages from predecessors in order for the total wage base to be considered when withholding the additional.9% Medicare tax from the employee.
What about employee annual limits on 401K's, HSA's or other items?
Employees and employers will need to make special arrangements to insure these limits are not reached during a split entity/transition year. It is easy to do, but will require either monitoring throughout the year, or precise calculation and planning in advance so that these combined entity limits are not exceeded. If the prior wage data is available to a successor, it may be possible to link these limits. Regardless, it would be prudent to have all parties fulling engaged actively monitoring these contribution limits so they are not exceeded in the first calendar year.
- How unemployment rates are calculated in Colorado: https://www.colorado.gov/pacific/cdle/premium-rates
- IRS article on predecessor/successor relationships: http://www.irs.gov/irb/2004-34_IRB/ar13.html#d0e2341
- IRS Guidelines for W-2 Processing (see page 12 for successors): http://www.irs.gov/pub/irs-pdf/iw2w3.pdf