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Employment Development Department (EDD): Successor Liability and Alter-Ego Audits

Successor Liability

The EDD has the power to issue a Notice of Assessment against the buyer or other successor of a business pursuant to CUIC 1731-1733. Any purchaser who does not avail himself or herself of the protection provided in the law becomes liable as of the date of the purchase of a business or as of the date his or her predecessor’s liability becomes final, whichever is later, for the amount due from the predecessor. The buyer, in order to protect himself or herself, should file a form entitled, “Discontinuance of Business Notice.” The buyer should also obtain a Certificate of Release from the EDD. A wise buyer will insist on obtaining a Clearance Certificate from the EDD prior to the close of escrow. This certificate is absolutely essential if the buyer or other successor wishes to avoid any type of transferee or successor liability.

If the purchaser of a business or inventory of goods does not request a Clearance Certificate from the EDD, the purchaser can be billed or assessed for the predecessor’s liability to the extent of the purchase price. The EDD can also issue a jeopardy assessment against both the predecessor and the successor.

Alter-Ego

Alter-ego assessments and collections are pursued by court action against the alter-ego of a corporation in those cases involving closely held corporations. In such cases where the shareholders are merely the alter-ego of the corporation, the courts will treat the shareholders and the corporation as one, rather than as separate entities, and hold individual shareholders personally liable for corporate obligations.