Thank for your time on this. I own an corporation and would like to purchase a sole proprietorship that has a long track record in its service industry. I would like to know what type of protection it would get once I purchase it.
Would it get the same legal protection my corporation has?
What type of liability would I take? I spoke to another lawyer and he said I would not take on any tax or personal liabilities the owner has.
Lastly, would I be able to keep that company's EIN and same license numbers? I know that if a new EIN is issued, like if that company incorporated, it would have to get new licenses in its industry. I would really like to keep its history if allowed.
What other type entity can purchase this sole proprietorship?
Thank you, I'm expanding my business ventures
Congratulations on this new venture and acquisition. My thoughts/responses are as follows:
1. Your corporation may purchase the *business*, not the sole proprietorship. In other words, the corporation may purchase the assets, liabilities, and goodwill of the business.
2. The business you acquire, if owned by the corporation, would in theory be protected the same as other business you conduct under the corporate structure.
3. I agree with your prior lawyer's assessment that it would be unwise to take on tax or personal obligations from the seller. Part of the asset purchase agreement should include warranties that there are no outstanding tax or personal liabilities impacting the business (paraphrased, of course).
4. To the best of my knowledge, EIN's can be transferred, but between businesses owned by the same individual or legal entity who applied for the EIN. I think you may be out of luck here, but further research is necessary.
I strongly advise that you work with a business attorney to help you with the acquisition. This is not something that should be handled by a layperson.
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First, you'll want an attorney to properly document this for you.
If you do an asset purchase agreement properly, the assets are acquired by the corporation so that from that day forward, operating the business will be the same as if it had been part of the corporation originally.
Generally, in the asset purchase agreement, you can contract to assume or leave behind specific liabilities of which you are aware. But, for example, if you acquired a company producing a defective product, the corporation would be responsible for liability going forward, though you might be able to contract to leave any pre existing unknown liabilities behind.
With regard to the EIN, I would first contact the IRS and ask them about it. Alternatively, tax attorney or an accountant might be better able to answer this. I am not so sure that if it operated with its own EIN number that it would need a new one if incorporated. Of course, if it used the SSN of the owner it would. With regard to licenses, call of the licensing agencies involved and ask.
It is impossible to provide a definitive answer to your questions, because there are various ways that one business can "purchase" another, and various ways that the purchaser can fold the purchased business into its existing business.
You should retain a tax advisor and a business lawyer; tell them what you want to accomplish; and let them describe the various approaches that are available and how well each can help you achieve your objectives. (There may not be one approach that is best in all regards.) Then, with their guidance, you can decide how to proceed.
This information does not constitute legal advice and does not establish an attorney-client relationship.
With the caveat that I do not have all of the background I can tell you the following:
(1) You should be able to incorporate the sole proprietorship with no problem. I know for certain that one can convert an LLC to a corporation and maintain the same EIN. If in fact the sole proprietorship has an EIN, rather than the Social Security number of its owner, I am reasonably certain you can keep it, though your accountant should be able to confirm that.
(2) If you acquire the assets of the sole proprietorship you could operate the business as a division of your current corporation, or as a separate corporation or LLC held as a subsidiary of your current company. It sounds like
In order to enjoy the insulation from liability provided by a corporation or LLC, you must either make this new company a part of your corporation, or create a new entity. If you need the new company to continue its existence under its EIN, then my first inclination is to convert to an LLC or corporation and let your corporation hold the equity.
If the ongoing issue were not present, I would say acquire assets and then continue the business.
I would suggest that you purchase the assets of the business, including the goodwill in the name of your existing corporation if appropriate (service, merchandise, etc), and obtain the DBA, if any, from the seller and use it by your corporation. Exclude all past liabilities. Make sure the purchase price on the escrow paper is allocated among the assets such that to provide you with the most tax advantageous outcome. Allocate the cost as much as you can to the furniture, fixture or equipment and less to goodwill. The seller will try to structure the escrow for his or benefit as well. Of course, there are limits to this and the IRS may not agree if too aggressive. Because the same information is reported to the IRS by the seller on the Form 8594, “Asset Acquisition Statement” under Section 1060. Alternatively, establish a new corporation, buy the assets in its name, and use the DBA with reputation in the new corporation. There is no good reason to keep the prior FEIN. Good luck.
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