Buying An Unlicensed Business.

[Riley'sLife]

I assume the requirement for a business to be licensed is to enable the Tax Authority to know the business exists and to enable tax to be collected.

Could a buyer of an unlicensed business be held responsible for unpaid taxes, the liability for which was created before the new owner's purchase?

Anyone have experience of this and can offer information and any other insight into potential problems of buying an unlicensed business.

[jamescollister]

Pretty wide open question, buying a side walk noodle bar or a computer chip manufacturer. Think you need a few more details. Jim

[otissp]

Im just making this up, but why buy the business itself? Why not just buy the assets of the business and found a new business with a proper license? I mean if they were "unlicensed", i.e., did not actually exist as a legal entity, it's not possible to "buy" them anyway. So shouldnt be a problem. At any rate, ask an attorney is best, or give more details here and we can make more stuff up.

[whybother]

If it's an unlicenced business, then as far as the government is concerned, you are not really buying a business ... I would have thought.

There are no books to work out what taxes should have been paid, and they're not your books anyway.

[BrianCR]

Why not consider Thai business laws? A (Thai) owner operated business does not need registration. If you are buying it (as a non-Thai) you will need to register it,you will be obligated to tax and other involvement after registration and remember you can only legally own 49% . Unless you are a yank!

[Riley'sLife]

There are numerous "businesses" for sale that are simply run by people as private individuals in Thailand. They neither have a legal nor corporate identity as such but are I suppose what we would term sole proprietors in the West. Many are run without the knowledge of the tax authorities. For example, the noodle stall as someone mentioned, a restaurant constructed of bamboo and built on rented land, an internet cafe, or hair salon in a shophouse, a roadside coffee shop, the banana pancake mobile shop, etc., etc. Many Thais simply start a small business like this and don't even keep records and have no contact with the tax authorities and don't bother to form a Limited Company or other Corporate Entity.

Most of these types of "business" are hardly viable financially and only provide a small income for the individual owner/s. The purchase of a business like this is akin to buying a job. However, sometimes the odd one can develop into a veritable goldmine although even in these few cases the owner/s will not bother to protect their interests by obtaining the correct licences, and prefer to trust in Buddha and surplus cash to make any problems go away. It is the acquisition of this type of business that I am referring to.

Whether the purchase price represents the asset value, or the trading value of the enterprise would not, in my opinion, have any bearing on the liability for past unpaid tax that may be created. In my experience of the Thai Tax Authorities, the lack of book-keeping definitely does not preclude the likelihood of a tax assessment being levied. This would then place the onus of proof that the assessed amount is not due on the new business owner without him having the paperwork to evidence the fact!

Being specific:- A restaurant is operated from a rented lock-up shop on a 3+3+3 yr lease. The business owner rents separate living accommodation above from the same landlord. The owner is the chef and employs 5 staff, with the owner's brother out front. Stock is delivered and paid for on delivery in cash. There is a POS computer installed and video record surveillance cameras with a live feed to the upstairs living accommodation. All outgoings are paid in cash. The takings are 600,000+/ month, the owner pockets 280,000+/month. The business has been running 3 yrs and is not licensed. The owner says no tax has been paid.

I am interested to buy but .........! OK, I could get the present owner to contractually indemnify me against any claim for tax liable during her term of ownership, but I doubt that would offer me much real protection. I am thinking of contacting the Tax Authority myself, but that could open a whole new can of worms for the owner. I don't really want to form a Ltd. Co either.

[whybother]

<snip>

I am interested to buy but .........! OK, I could get the present owner to contractually indemnify me against any claim for tax liable during her term of ownership, but I doubt that would offer me much real protection. I am thinking of contacting the Tax Authority myself, but that could open a whole new can of worms for the owner. I don't really want to form a Ltd. Co either.

Why would you be liable for any tax prior to your ownership. As far as the tax man is concerned, the business didn't exist. You are starting up a brand new business.

[Riley'sLife]

Yes, that would be my initial thoughts too, (except that the business would not be brand new, but the ownership would be – I would keep the restaurant’s name).

But, I have heard a few stories of debts being dealt with here in ways which are unusual to my experience, which is why I asked the question, plus I have no experience of the implications involved with an unlicensed business which has been trading for several years. Maybe I’m being over-cautious then? I am wanting to avoid any unpleasant surprises, and the oft repeated phrase shortened to "TIT" is ringing in my ears!

Thanks to all for the responses, much appreciated.

[whybother]

Yes, that would be my initial thoughts too, (except that the business would not be brand new, but the ownership would be – I would keep the restaurant’s name).

But, I have heard a few stories of debts being dealt with here in ways which are unusual to my experience, which is why I asked the question, plus I have no experience of the implications involved with an unlicensed business which has been trading for several years. Maybe I’m being over-cautious then? I am wanting to avoid any unpleasant surprises, and the oft repeated phrase shortened to "TIT" is ringing in my ears!

Thanks to all for the responses, much appreciated.

Possibly the "debts that are treated differently" might be debts to loan sharks.

[w11guy]

I don't know specifically about Thai tax laws, but I think in the UK (and it could be similar here) you could be liable for back taxes even if you started a new limited company. The tax authorities would probably argue that you have taken over an existing business and that business owes taxes. I think you are on dodgy ground if taxes should have been paid but weren't. If I bought Tesco (UK) or Walmart (US) and set them up as a new limited company, then the new company would still be liable for any taxes that the old companies owned. If you buy a company you're buying everything, including liabilities.

But as someone else suggested, why don't you just buy the assets and start afresh. If you keep the same name, same staff, etc, it's still the same company whatever legal set-up you come up with. You can't just transfer company A to company B and leave the tax liabilities behind.

You need to take legal advice of there are large tax liabilities. And make sure the money you think you'll make will cover those liabilities just in case you are forced to pay them.

[w11guy]

<snip>

I am interested to buy but .........! OK, I could get the present owner to contractually indemnify me against any claim for tax liable during her term of ownership, but I doubt that would offer me much real protection. I am thinking of contacting the Tax Authority myself, but that could open a whole new can of worms for the owner. I don't really want to form a Ltd. Co either.

Why would you be liable for any tax prior to your ownership. As far as the tax man is concerned, the business didn't exist. You are starting up a brand new business.

He's not starting a brand new business. He's taking over an existing one. Changing the legal structure doesn't wipe out any tax liabilities. If that was the case you could just close a successful business a day before tax was due and start again with another company and avoid the tax. You are very naive if you think it's that easy to avoid tax.

In this case it depends if there are any actual liabilities. If he current owner should have paid tax but didn't I'd avoid it at all costs.

An another thing. If the business was hidden from the authorities in order to pay tax, the tax authorities would just sit back and say 'oh, not need to pay taxes because you didn't exist'. That's called fraud and is a very serious offence. I'm not saying that's the case here, but I wouldn't want to be anywhere near a company that had been avoiding tax and acting fraudulently.

Edited May 7, 2012 by w11guy

[CWMcMurray]

An unregistered sole proprietorship is a legal form of business in Thailand and all taxes are not owed by the business, but are considered as "personal income tax".

Given this, there is no chance that buying this type of business that you will be liable for any income tax, as the previous owner would hold the entire tax burden, not the "company"

quote: CHAPTER 14 - CORPORATE INCOME TAX

Sole proprietorships and unregistered partnerships:- Individuals, sole proprietorships and ordinary (unregistered) partnerships existing under Thai law are not subject to corporate income tax as juristic persons, but are subject to income tax as natural persons and pay tax at progressive natural person rates of 10% - 37%.

http://www.bia.co.th/018.html

Sole Proprietorships are not considered as Juristic persons and can not be sold the same way that a corporation can be bought and sold. Also Liabilities do not carry over the same way that they would for a corporation.

Edited May 7, 2012 by CWMcMurray

[farang000999]

i am not sure if this was a hypothetical scenario but how does a local restaurant with all of 5 staff earn 280k baht/month?

[brit1984]

doesn't sound like a compelling investment case from what I have heard so far

what sort of entry multiple are you planning to pay?

[samran]

There are numerous "businesses" for sale that are simply run by people as private individuals in Thailand. They neither have a legal nor corporate identity as such but are I suppose what we would term sole proprietors in the West. Many are run without the knowledge of the tax authorities. For example, the noodle stall as someone mentioned, a restaurant constructed of bamboo and built on rented land, an internet cafe, or hair salon in a shophouse, a roadside coffee shop, the banana pancake mobile shop, etc., etc. Many Thais simply start a small business like this and don't even keep records and have no contact with the tax authorities and don't bother to form a Limited Company or other Corporate Entity.

Most of these types of "business" are hardly viable financially and only provide a small income for the individual owner/s. The purchase of a business like this is akin to buying a job. However, sometimes the odd one can develop into a veritable goldmine although even in these few cases the owner/s will not bother to protect their interests by obtaining the correct licences, and prefer to trust in Buddha and surplus cash to make any problems go away. It is the acquisition of this type of business that I am referring to.

Whether the purchase price represents the asset value, or the trading value of the enterprise would not, in my opinion, have any bearing on the liability for past unpaid tax that may be created. In my experience of the Thai Tax Authorities, the lack of book-keeping definitely does not preclude the likelihood of a tax assessment being levied. This would then place the onus of proof that the assessed amount is not due on the new business owner without him having the paperwork to evidence the fact!

Being specific:- A restaurant is operated from a rented lock-up shop on a 3+3+3 yr lease. The business owner rents separate living accommodation above from the same landlord. The owner is the chef and employs 5 staff, with the owner's brother out front. Stock is delivered and paid for on delivery in cash. There is a POS computer installed and video record surveillance cameras with a live feed to the upstairs living accommodation. All outgoings are paid in cash. The takings are 600,000+/ month, the owner pockets 280,000+/month. The business has been running 3 yrs and is not licensed. The owner says no tax has been paid.

I am interested to buy but .........! OK, I could get the present owner to contractually indemnify me against any claim for tax liable during her term of ownership, but I doubt that would offer me much real protection. I am thinking of contacting the Tax Authority myself, but that could open a whole new can of worms for the owner. I don't really want to form a Ltd. Co either.

I think you are getting a few things confused.

Firstly, you buy any business, you do your due dilligence. The business is an entity in itself. If you buy it, you purchase its assets and its liabilities. It is up to you to decide whether one outweighs the other.

Secondly, there is not need to license a business, unless a license is required. I run my own business, and there is no need for licenses. What is required is that it gets a Tax ID number, to pay tax.

Thirdly, there are sole proprietorships in Thailand. Indeed, I would think they make up a vast majority of the company's you are describing.

These sole proprietorships do include your noodle vendors etc, and you'll probably find if you dig a little more that the ones you are looking at are indeed sole proprietors.

If you understood how the tax system works for them, you'll soon understand that there is probably no need for them to pay much, if any, tax at all. Sole propritatorships count all revenue as personal income of the sole proprietor. So there is no way the 'business' itself is going to pay any tax.

Additionally, laws allow for anywhere from 70% to 90% of the revenues to be AUTOMATICALLY be written off as expenses without the need for proof. This obviates the need for much in the way of record keeping.

As such, unless the sole proprietor has a personal marginal income that attracts tax, it is unlikely that they will be paying any tax, especially if you are talking about 'mom and pop' small stalls/noodle vendors etc.

Edited May 7, 2012 by samran

[brit1984]

The real issue is how to determine a fair entry price if the company does not have proper accounts (i.e. that have been submitted to the tax authority). Unless the OP is buddies with the vendor (or has an inside track into the real accounts), this will be very difficult to gauge.

If he is indeed buddies with the vendor they should make a gentlemen's agreement (and sign a contract) to indemnify the OP against any back dated tax liabilities.

[w11guy]

i am not sure if this was a hypothetical scenario but how does a local restaurant with all of 5 staff earn 280k baht/month?

280k per month is only around 9k per day. So that's just 30 meals at 300 baht each. There are plenty of restaurants that sell that and much more.

[farang000999]

no he said the restaurant was making 280k/baht a month with 5 employees, so they are earning >9,000 baht a day.

i am not sure if this was a hypothetical scenario but how does a local restaurant with all of 5 staff earn 280k baht/month?

280k per month is only around 9k per day. So that's just 30 meals at 300 baht each. There are plenty of restaurants that sell that and much more.

he said profits of 280,000/month w/ 5 employees.