We are currently going through DD to purchase an LLC business, with two employees classified as 1099. Examining the IRS 20 question checklist makes it seem they should be classified as W-2 employees, which is my intent for them after I finalize the purchase.
Question 1) If I purchase the LLC and keep the current business structure intact, would I/the business be liable for a negative determination from the IRS during an audit on prior 1099 reporting, or would this liability fall on the previous owner?
Question 2) If I made the business purchase an asset purchase only, and thus move all assets/contracts/intangibles from the current LLC into a newly formed C-corporation (from which I would newly employ the two people as W-2) would this eliminate the prior liability risk?
Thanks in advance
As a separate entity, the business is liable for its past actions, regardless of who its current owners might be. However, this is something that can be handled in the transaction, if that is the route you choose. For example, you can set aside cash for such an eventuality for a period of time. Alternatively, the asset purchase option is available as you suggest, so long as it is structured well. You want to consult with a business attorney to avoid the pitfalls of issues like this.
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your scenario 2 gives you a lot more options and lessen risks of unforseen skeletons in the closet of buying an llc.
your question has a lot of simply administrative parts and issues to work through, not to mention business formation strategy questions.
You should definitely consult a business attorney.
There are significant differences between purchasing the LLC interest as compared to purchasing the assets of the business. Not only will you want to have an attorney review the matter, you may want to either have that attorney examine the "transferring liabilities" question with the labor commissioner. I know that with the SBOE, even if you just buy all or substantially all of the assets, some liabilities transfer with the assets being purchased...so, to get a clean transfer takes the experienced eyes of an attorney...visit the websites below.
Shawn Jackson ESQ. (707) 584-4529
Business Development Attorney EMAIL: [email protected]
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