Buying a Business in Rhode Island: How to Avoid Assuming Tax Liability

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

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

Tax Clearance Letter (Letter of Good Standing)

A tax clearance letter (also known in Rhode Island as a letter of good standing) is proof that all of a business’s required state tax returns have been filed and all tax accounts are paid up. Letters of good standing are issued by the Rhode Island Division of Taxation (DOT). You can request a letter by completing Form LOGS, Request for Letter of Good Standing.

The form can be used for every common business structure, such as corporations, LLCs, partnerships, sole proprietorships, and non-profit corporations. One section of the form allows you to indicate whether a major sale or liquidation is involved. In such cases, along with the LOGS form you also must provide a statement of the sales price, to whom the assets are being sold, and a description of those assets.

The request must be signed by a member or officer of the company that is authorized to handle tax matters or someone with a power of attorney. That means that if you’re trying to buy the business, you’ll need the cooperation of the current owners to get a letter. There is a $50 fee to file the request. For more information, review the instructions included with the form or check the forms section of the DOT website.

You can mail your request to:

Letter of Good Standing

Compliance & Collections

Rhode Island Division of Taxation

One Capitol Hill

Providence, RI 02908

UCC Liens

If you are buying a Rhode Island 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 public search on the Rhode Island Secretary of State website. Unlike some other states, Rhode Island’s UCC search system provides relatively full information, including images of UCC financing statements, for free.

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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