Forming A New Entity is Essential for a Business Loan!
Forming A New Entity is Essential for a Business Loan!
When you buy your business and obtain a loan for business acquisition, the borrower will be the business itself, not you personally. You and any 20% or more owners will be the guarantors.
So unless you already have one you intend to use, you need to form a new business entity (unless it’s a stock purchase, more on that later) to finance a business asset purchase. More importantly, it needs to have a Tax ID or EIN for loan processing and approval. Corporate filing is a separate task you can undertake after you get the EIN which lenders need at the beginning of the process, often to make application, especially on smaller transactions below $350,000 (SBA’s Small Loan Advantage or SLA program requires EIN to apply).
How do you get your Tax ID?
There are on-line services that promise fast turnaround etc. We recommend that you acquire the Tax ID (EIN) directly from the IRS. The best way to do that is to visit the IRS site for this which is open during normal operating hours, i.e. it’s not purely automated, and you can get that done very quickly, usually in a day or so, sometimes in just a couple hours from when you applied.
The IRS website currently being used to apply for an EIN is:
You can then apply for the appropriate business registration through the state government where the business is located. CPA’s have advised us that you can change addresses and names later, but certain types of entities are not interchangeable – like partnerships vs. corporations. But S-Corp and C-Corp for instance is a tax filing option that does not affect the EIN.
Stock Purchases
Should you actually make your business acquisition a stock-purchase instead of an asset purchase? Most attorneys advise against it because you will assume the seller’s legal liabilities, if not the financial ones.
The Healthcare industry is an area where stock purchases are sometimes necessary. In certain locations, e.g. South Florida, Massachusetts, New York, it takes a long time to become credentialed for insurance plans. In those places, if the practice is not billing “out of network” and depends on in-network credentialing, you may need to use a stock purchase to assure a smooth transition while you become credentialed, which may take many months.
In most areas, doctors can become credentialed in a reasonable timeframe, so asset purchases are the preferred method – in our opinion. Note: we can also give some case-by-case guidance on seller transitions with billing. You need to know the insurance rules in the specific state regarding practice transitions.
SBA lenders can usually approve a stock purchase. Without an SBA guaranty, some banks have a problem with the liability – but most are OK with it. We can help you find out if it’s an issue for lending – it usually is not. But it will increase your legal fees for closing a loan in most cases, FYI. Bank legal costs are financed into SBA loans as part of project cost, so it should not be a problem.
You should consult a licensed accounting or legal professional for their opinion and if you have any technical questions. These tips are so you can get started on your loan process without unnecessary delays. You can change from an asset purchase to a stock purchase or vice-versa after you’re approved, prior to the loan closing. We’ve seen it done on multiple occasions because of unforeseen circumstances and it worked out fine, but not without delays, so try to figure it out up front.
We’ve been helping people buy businesses for over 20 years and know how lenders process these loans, so it’s about being prepared when you get started.
We look forward to helping you succeed! Call 813-891-1811 today or send us an email from our Contact page!