"Prior to you go out and buy an existing small business, you require to make certain that the books and accounting remain in order. You require to see a balance sheet and P&L declaration, and you require to verify that information. What did Henry Kissinger and Ronald Reagan state in foreign diplomacy and settlement? ""Trust, but verify!"" And, it is my contention that you take this terrific advice when buying a used organisation.
Recently, I was doing a little extremely small business consulting. And I described that prior to buckling down about purchasing the business the purchaser requires to get a balance sheet, P & L (profit and loss) declaration, and 3-years tax returns. Well, it ends up business was a corporation represented by an ""Inc."" after the name of the company at the top of the P & L, so, the business depending upon the type of corporation would have to file corporate tax returns.
However, when asked to produce these, they said they faced tough times and did not submit in 2007 and 2008, and did not have the 2009 taxes done yet, which actually are not completely due up until September of 2010 with designated IRS extensions. Intriguing I thought, however then I take place to mention this concern relating to purchasing a business from a Corporation, which stopped working to submit its taxes for 2008 and 2009 this evening to a Tax Accounting Professional at the Club Home here.
He said this could be a big issue; particularly, not filing at all is a lot worse than filing and not having the ability to pay, as the Internal Revenue Service would set up a payment structure to come current. The 2009 taxes theoretically are not due till September if he 'd submitted an extension. But 2007 and 2008 are a genuine issue.
Now then, before I go any even more, I need to make a declaration to the reader here; CYA - I am not a Tax Attorney, this is not legal advice, and I suggest you confirm this discussion (rumor) with a certified and expert Tax lawyer Professional. I am not certified to provide you legal suggestions, would never ever practice law without a license, and you can not take anything I state as legal advice. Okay so, CYA aside, this is my viewpoint and why I think this:
You see, I also spoke with someone at Starbucks a couple of weeks back, and he informed me a story where a business that failed to submit taxes, and consequently went bankrupt had actually paid him as an electrical/mechanical contractor for constructing improvement. The other supplier's plumbing professional, TI man, drywaller, etc. and the IRS never ever made money, as the company lacked money.
The Bankruptcy court came after the electrical contractor to pay back the cash for the services he 'd rendered completely, and the BK Court John Du Wors Attorney stated that cash would be divided among the rest of the financial obligations, and in 18-months, the electrical specialist would get a check, maybe 10 cents on the dollar or his share. He had to repay the cash he had actually been paid. Oops. Hence, the $80,000 was paid back to the court, had he not paid, that BK Court could require him to pay it. Kind of like the folks who were repaid from the Bernie Madoff money prior to everybody finding out it was a Ponzi Scheme, despite the fact that they got their money back, it really was owed to all the other individuals too. Everyone loses.
Similarly, according to the Tax Lawyer I spoke with, the assets of the Corporation (in this case Company For Sale Inc.) could be subject to a lien by the IRS, really all properties of that corporation. If the president of that business offered those properties to the buyer, it could be fraudulent conveyance, and thus, even though they remained in the buyer's ownership and a brand-new corporation, the buyer might have to pay - or surrender that equipment to please the lien, and think what, they 'd have the business's address and could put a lock on the door - tough luck.
In addition, in this case, we had business for Sale Inc. with no way to prove the balance sheet or P and L, aside from 8-sheets of paper from a Quicken Program. And no Organisation Broker in their right mind would continue the listing with that giant red flag out front. Okay so, in this case as an extremely small company specialist might state - ""I have no chance to identify if this is so, all I can do is hypothesize?""
Nonetheless, there is sufficient factor to provide no more for this company than the value of the secondhand devices, and still, how can the purchaser know if company owner or his corporation owns everything free-and-clear, or if they obtained against a credit limit at the bank on the assets of the company, not to mention the back taxes owed, which the Corporation's President claims are owed. He might not have ""really"" made any cash in those years, but assuming he did, he owes, and without those being paid, all the assets of that corporation are in limbo from what my friends and acquaintances inform me.
Thus, this organisation case study is a wake-up call to anyone buying a service. And if you find yourself in a similar scenario, and if you want to pursue such an organisation purchase further, I would advise you speak to a professional tax lawyer prior to you proceed. You see buying an organisation involves danger, and when such variables and unpredictabilities are added to the formula it makes sense to seek counsel on this set of situations. Tax Lawyers typically have time on their hands to sit down to go over things like this after April 15, and indeed, you 'd truly only need an hour or 2 to ask this concern, and get the ""right"" response."