Dear Rick:
For about 10 years I owned a small business with a friend of mine. Last year we decided to part ways and I bought her out. We were a Subchapter S corporation and basically, I gave her cash and she gave me her stock in the business. The breakup was very amicable and everything went very smoothly. We probably should have used the services of an attorney, but we didn’t feel that we needed one. The problem that comes up is that I just received notice from the IRS that we owe back taxes for 2016. I talked to our accountant and he agreed that the IRS was correct and that I owe the money. I went back to my former partner and told her that she should pay half of the tax liability. My thought was that we were still partners in 2016 and thus, she should be partially responsible. To my surprise, she said that she was not responsible and she would not contribute. I am thinking of hiring an attorney and suing her. However, before I get involved I wanted to know your thoughts. My question to you is from a legal standpoint, do you think that she is responsible for half of the taxes?

Thank you.
Francine

Dear Francine:
I hate to be the bearer of bad news but from a legal standpoint, based upon what you have told me I do not think she is responsible.

There are two ways to buy a business. You can buy the assets of a business or you can buy the stock of the company. Even though they sound like they’re the same transaction, they have different legal implications. When you buy the stock of the business you are also buying any of the business liabilities known or unknown. The 2016 tax assessment is a liability and thus, the business would be responsible for those taxes..

As opposed to buying the stock of a business, many business purchasers will buy the assets of the business. The consequence of this transaction is that you are not assuming any outstanding liabilities of the business. Therefore, if someone bought the assets of a business, and the IRS came in and assessed additional tax liability, the purchaser would not be responsible for those taxes.

Because there are legal and tax implications when you buy a business, my recommendation is to always consult with a business attorney. I recognize that in transactions between family members or friends it can be awkward to hire an attorney; however, it shouldn’t be. An attorney can make sure that all the I’s are dotted and the T’s crossed and everyone knows what their responsibilities are.

I recognize that a lot of people think that if you hire an attorney what you’re really saying is that you don’t trust the other person. As far as I’m concerned, nothing can be further from the truth. The reason why you hire an attorney to represent you is that you don’t want what’s happening in the situation at hand to happen to you. My belief is that whenever there is a sale involving a business, it’s a good idea to have an attorney represent you and only you. After all, the attorney will have much more experience in handling these types of transactions and will know what the potential issues are. Yes, attorneys can be expensive; however, in the great majority of cases it’s a small cost to pay to protect yourself.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.