Buying an existing business can have its advantages. By purchasing a business that is already established, you may eliminate some of the problems associated with starting a brand new business. However, when you acquire an existing business, you may also acquire its debts. Purchasing an existing business can be fairly complex. The following is a brief summary of some of the concerns of which you should be aware.
Be sure to ask the following questions:
If you purchase a retail business, you may be liable for sales tax debts of the business. As a precaution, you should get a tax status letter from the Colorado Department of Revenue before buying. The tax status letter must be requested by the current owner using Form DR096. Tax status letters may be requested on all state collected tax accounts including sales tax, wage withholding and corporate income tax accounts. There is a $10 charge for each tax letter requested.
If you purchase a corporation or limited liability company, you may have the option of keeping the same sales tax account with the Colorado Department of Revenue. If you purchase a sole proprietorship or a partnership, you are required to open a new sales tax account. When you purchase tangible property as part of a business (such as new or used furniture, fixtures or equipment) for which you have not paid sales tax, you must pay a state sales/use tax.
“Home Rule” cities may collect use taxes directly, and there may be additional liabilities for personal property taxes imposed by the county. Contact the local city clerk, the county assessor and/or the county treasurer’s offices for more information regarding local use and personal property taxes.
You must establish all new tax accounts when buying an existing business, except when purchasing the stock of an existing corporation and continuing the operations of that corporation. The previous owner’s sales tax licenses, state wage withholding and unemployment insurance accounts and federal employer identification numbers do NOT transfer to you, the new owner.
You will be responsible for withholding income tax, Social Security (FICA), Medicare and local employment taxes. You will have to pay the employers portion of FICA, Medicare and local employment taxes. You must open new employee payroll accounts unless you buy out the stock of an existing corporation or membership in a limited liability company and do not set up a anew business entity. In every case, the unemployment history established under the former owners will transfer to your unemployment insurance account. When you purchase the business, the former owner should file Form UILT-2 to report the change in ownership for unemployment tax purposes. For more information on payroll tax requirements see the Employer Responsibilities section of this guide.