Buying a Business in Illinois: How to Avoid Assuming Tax Liability

Find out how to get a tax clearance letter and check for UCC liens in Illinois.

If you are buying a business in Illinois, you will want to obtain tax clearance from the state to make sure you are not taking on the seller’s outstanding tax liability. Buyers often assume that if they acquire a business through an asset purchase as opposed to a stock sale then they will not be responsible for any of the seller’s unpaid taxes. However, most states have successor liability rules that allow the transfer of certain tax liability to the buyer even in an asset purchase. Often this type of successor liability is limited to sales and use tax and other excise taxes that a seller collects on behalf of the state.

Obtaining a tax clearance letter from the state is important assurance for a buyer in an asset or a stock purchase that they are not taking on unpaid tax liabilities of the seller. In addition to obtaining tax clearance from the state, a buyer of an Illinois business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.

Tax Clearance Letter (Tax Clearance Certificate)

A tax clearance letter is proof that all of a business’s state tax accounts are paid up with the state taxing authorities. Under Illinois law, the buyer of most or all of a business’s assets may be required to hold back from the purchase price an amount of money sufficient to cover the seller’s unpaid taxes. Illinois law also requires various filings when a business or its assets are sold. For details about these various requirements, check Section 130.1701 of the Illinois Administrative Code.

You can request a tax clearance letter from the Illinois Department of Revenue (IDOR). Use Form ITR-1, Request for Tax Clearance. The form includes places to indicate such things as whether the business makes retails sales in Illinois and whether it has employees. The form can be used to request clearance for roughly a half dozen state taxes, such as business income tax and withholding tax.

An owner or officer of the business, or someone authorized by the business through a power of attorney, must sign the request. That means that if you’re trying to buy a business, you’ll need the cooperation of the current owners to get a letter. For more information, including access to the request form, check the IDOR website.

If the business has employees and makes unemployment insurance payments, either the buyer or the seller also can submit a Form UI-2600, Request For Letter Of Clearance, to Illinois Department of Employment Security (IDES). Check the IDES website for more details and a copy of the request form.

UCC Liens

If you are buying an Illinois business, you’ll also want to make sure the assets you are acquiring are not subject to any liens. You can do this by checking the state’s public records for creditor financing statements. This gives you notice of what secured debt you’ll be acquiring (if any) related to the business’s equipment, inventory, and possibly other items. You will want to do this whether you are buying the business in an asset or stock purchase.

You can do a UCC search on the Illinois Secretary of State website. To perform a certified search —which ensures that the information involved is not expired — with images UCC financing statements, you must submit a special request form. Illinois’s search site also allows you to search for federal tax liens.

Other Debts

If you are buying a business, there are other possible kinds of business debt not covered here that you might want to investigate, particularly in a stock acquisition. This could include, for example, unpaid local taxes, guarantees, or other private contractual obligations.

For all the essential information about buying or selling a business, get The Complete Guide to Buying a Business (Nolo) and The Complete Guide to Selling a Business (Nolo), both by Fred S. Steingold.

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