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

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

If you are buying a business in Minnesota, 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 Minnesota business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.

Tax Clearance Letter

As a buyer of a Minnesota business, you must check for possible tax liens filed against the business by the Minnesota Department of Revenue (DOR). This means checking the county recorder’s office in the county where the business is located. If you find any tax liens, you must submit Form C50, Notice of Business Transfer, to the DOR at least 20 days before closing on the purchase of the business. You can also write a letter to the DOR instead of using the form.

The DOR normally will respond to your filing within 20 days. The response will include information about any sales and/or withholding tax liabilities for the business. If you do not receive a response within 20 days, you are not responsible for any tax liens other than what is due on a lien at the county recorder’s office. You must withhold unpaid taxes from the purchase price and pay that money directly to the DOR.

For more information, including about form C50, check the DOR website.

UCC Liens

If you are buying a Minnesota 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 Minnesota Secretary of State website to find out what creditor financing statements are on record. A UCC search 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 tax liens.

Minnesota only provides limited online UCC searching for free and without online registration. You will need a file number for the relevant UCC filing to do a free search. For other searches, such as ones using the business name, you must create an online account and pay a fee.

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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