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How to protect against successor liability in California

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    Generally, as part of a purchase or sale transaction, the purchaser should request a Tax Clearance Certificate from the State of California before closing. The Tax Clearance Certificate essentially guarantees no taxes, interest, or penalties are due from the predecessor. If the Board of Equalization (BOE) determines there is no such liability the certificate will be issued. Once issued, the purchaser is released from any tax liability held over from the operation of the business by the previous owner/operator. Alternatively, a purchaser will also be released if he or she makes a written request to the board for a certificate and the board does not respond within 60 days after the latest of: 1) the date the board receives a written request from the purchaser for a certificate; 2) the date of the sale of the business or stock of goods; or 3) the date former owner’s records are made available for audit.

    If there is a pending tax liability, then any successors or assigns must withhold sufficient proceeds from the purchase price to cover the amount of the tax liability until the former owner produces a receipt from the board showing that it has been paid or a certificate stating that no amount is due. If the purchaser fails to withhold from the purchase price as required, he or she becomes personally liable for the payment of the amount required to be withheld. The obligation of the successor shall be enforced by serving notice of successor liability on the person not later than three years after the date the BOE is notified of the purchase of the business.

    If the purchaser is buying a business with more than one location but is not acquiring all locations, then a clearance request should be made for each location. On the other hand, if the business has more than one location and the all locations are being acquired, typically only one clearance is needed.

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