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Make sure “It’s all good”, with the California State Taxing Agencies before buying an existing business.

Obtain an Entity Status letter from the Franchise Tax Board (FTB)

An Entity Status  Letter verifies whether or not an entity is in good standing with the FTB and provides certification for:

    •    Legal status in court proceedings.

    •    An outstanding liability that could have an effect on an entity's credit rating (e.g., the closing of escrow).

    •    Verification of an exempt status.

    •    Registering a corporation or LLC to transact business in another state.

It does not reflect the entity's status with other agencies.

You can request an entity status letter for the following:

    •    Corporations

    •    Exempt organizations

    •    Banks

    •    Financial institutions

    •    Limited liability companies (taxed as corporations, partnerships, or disregarded entities)

For other types of entities, get a Certificate of Status from the California Secretary of State for a fee.

Click here to check status:

https://www.ftb.ca.gov/online/self_serve_entity_status_letter/index.asp?WT.mc_id=Business_Online_EntityStatusLetter&WT.svl=BSt1

Obtain a Certificate of Tax Clearance from California Department of Tax and Fee Administration (Board of Equalization)

To protect yourself from having to pay any sales and use tax owed by the business you are buying, you should write to the Board and request a certificate of tax clearance. If you do not obtain a clearance before you buy the business, and if taxes are owed and the previous owner has failed to pay those taxes, you could be required to pay any taxes, interest, and penalties that are due.

After receiving your written request for a clearance, the Board will determine whether the business you are buying owes any sales and use taxes, interest, or penalties. If any money is owed, the current owner will be notified and advised to pay the amount due or you will be advised of an amount to withhold from the purchase price to cover the potential liability. This amount must be paid to the Board before a certificate of tax clearance is issued.

If the business you are buying has more than one location and you are buying one or more locations (but not all), you should request a clearance for each location. If the business you are buying has more than one location and you are buying all the locations, only one clearance is needed.

If you are buying a business through an escrow company, you should ensure that the company requests the certificate of clearance on your behalf. It is important to remember that if taxes are owed by the current owner and escrow closes without a certificate of tax clearance, you may be held liable for unpaid taxes (for the amount up to the purchase price for the business, which includes any assumption of indebtedness).

Click here for more information regarding the California Department of Tax and Fee Administration:

https://www.boe.ca.gov/sutax/faqbus.htm

Obtain a Certificate of Release of Buyer from the Employment Development Department

Section 1733 of the California Unemployment Insurance Code (CUIC) provides that any person or employing unit that fails to withhold money or other property or fails to pay the amount or value of the property withheld from the acquisition of an organization, trade or business, or substantially all the assets of an employer, shall be personally liable for the payment of State payroll taxes, interest, and penalties owed or unpaid from the seller up to, but not exceeding, the amount of the purchase price, if certain requirements are not fulfilled.

The buyer of a business is required to withhold, in trust, money or other property sufficient in amount or value to cover the amount due or unpaid from the seller until that seller provides a certifícate from the Employment Development Department (EDD) stating that no taxes, interest, or penalties are due.To avoid personal liability, the buyer should make sure that purchase funds are not distributed until the certificate is issued by the EDD. Compliance with Section 3440, Civil Code of the State of California, regarding the publishing of a Notice of the Intended Sale of Business, will not relieve buyer of their obligation in this respect.

Click here for more information from EDD:

http://www.edd.ca.gov/pdf_pub_ctr/de3409a.pdf

steve@stevesimsea.com