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

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

If you are buying a business in Michigan, 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 a Michigan 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 (known in Michigan as a tax clearance certificate) provides a statement that a business has no taxes due to the Michigan Department of Treasury (DOT). A buyer of a Michigan business must put money into a special account to cover any unpaid state taxes until the seller provides a certificate. In addition, for businesses that pay unemployment taxes, the seller must provide the buyer with certain unemployment insurance information at least two days before accepting the buyer’s offer to purchase the business.

Tax clearance certificates are issued by the Michigan DOT. Use Form 5156, Request for Tax Clearance Application, to request a certificate. The request must be made by a current owner of the business, such as a corporate officer or partner. 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 about withholding money for unpaid taxes, check the DOT website.

UCC Liens

If you are buying a Michigan 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 find out what creditor financing statements are on record by using the UCC Online Service on the Michigan Secretary of State website. The online service provides a record of secured liens that have been recorded on property owned by a business. The Secretary of State website also allows you to search for federal tax liens, state tax liens, and unemployment tax liens.

Note: Michigan only provides limited online UCC searching for free and without online registration. Use the Debtor Name Quick Search option for a limited free search.

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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