March 2015

New Businesses And Avoiding Liability

Every year, many of our clients choose to buy an existing business. Always a key question is whether they will be responsible for liabilities created under the former ownership. To answer this, you must look at the legal structure of the acquisition.

There are 2 common ways to purchase a business. First, you can buy all of the seller's ownership shares in the company, commonly referred to as a "stock purchase." Second, you can acquire all of the assets associated with the business, often referred to as an "asset purchase."

When the sale is done, these 2 produce similar results from a business perspective, but can lead to very different legal, tax and liability consequences.

In either case, the owner of the company stock is generally going to have primary liability to the company's creditors. So if you buy stock, you will own the company that is going to have this liability.

On the other hand, if you buy assets, the seller who retains the stock also retains the company liabilities.

In either type of purchase, the buyer and seller can agree to allocate specific liabilities to one or the other of them, and this agreement will be binding, at least as between them. Sometimes, as buyer, you may have liability to a third party regardless of your agreement with the seller. For example, some jurisdictions place successor liability upon the buyer for the seller's unfair labor practices, employment discrimination, and pension obligations. Under other environmental statutes and court decisions, a purchaser can be held liable for environmentally harmful activities and conditions caused by the seller prior to the purchaser's acquisition. However, the purchaser is not out of luck. Through specific planning and careful drafting, a purchase agreement can address allocation and assumption of these hidden risks. These carefully drafted purchase agreements are respected by most courts and effective to protect a purchaser from the assumption of the seller's unknown liabilities.

2015 Tax Numbers

  • Federal Estate Tax and GST Tax Exclusion = $5.43 million
  • Annual Gift Tax Exclusion = $14,000
  • Top Personal Income Tax Bracket = Still 39.6%
  • Maximum contribution to a defined contribution plan is lesser of $53,000 or 100% of compensation
  • Maximum IRA contributions still $5,500
    • 50 and older can contribute an extra $1,000 under catch-up provisions

Quick Facts for Annual Reports due to the NC Secretary of State

North Carolina allows you to file Annual Reports online

http://www.secretary.state.nc.us/corporations/

  • Click on "File Annual Reports Online"

Online Fees

  • Business Corporation = $18 + $2 electronic filing fee
  • LLC and LLP = $200 + $2 electronic filing fee

When are Annual Reports Due?

  • Business Corporations = Due by the due date for filing the Corporation's income and franchise tax returns
  • LLCs = Due on or before April 15th of each year following year of creation

Number of New Companies created in NC is Up

  • The number of creation filings has steadily increased over the past few years. These include filings for Business Corporations, LLCs, LLPs, LPs, Nonprofit Community Trusts, Nonprofit Corporations, Professional Corporations, Professional LLCs, Captive Insurance Companies, and RLLLPs
  • Fiscal Year runs from July 1-June 30
  • 2012-2013- 58,574 new filings
  • 2013-2014- 61,965 new filings
  • 2014-2015 (as of 12/31/2014) - 31,104 new filings