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Are Business Owners Personally Liable for a Company's Unpaid Taxes?

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By Christopher Coble, Esq. on March 11, 2015 3:27 PM

According to the IRS, businesses owed over $100 billion in unpaid taxes in 2011 alone. With Tax Day just around the corner, one question many business owners may be asking is, "Am I liable for my business' back taxes?"

The way your business is set up helps to determine whether or not a business owner is personally liable for a company's taxes. Sole proprietorships, partnerships, limited liability companies (LLCs), and corporations are all taxed differently.

Here's a general overview of what you need to know:

Sole Proprietorships

For a sole proprietorship, the business and the owner are the same. The owner owns all the business' assets and liabilities. The IRS does not tax the business itself, but rather it taxes the business owner's income. As such, if there are any back taxes owed, the business owner is solely liable.

Partnerships

Partnerships are treated very similarly to sole proprietorships. The partnership itself isn't taxed; rather, the partnership's income is "passed through" to the partners who are then individually taxed on their income. Partners in a partnership are then responsible for their own back taxes.

Limited Liability Companies

LLCs are taxed similarly to sole proprietorships and partnerships. A one-member LLC is essentially a sole-proprietorship for tax purposes. Co-owned LLCs are typically treated as partnerships by the IRS (unless the LLC opts for tax treatment like a corporation). Liability for unpaid taxes are treated the same as well.

Corporations

According to the U.S. Supreme Court, a corporation is a person. It is taxed as a separate entity. As such, the corporation itself is liable for its unpaid taxes. Partners, or owners, of the corporation aren't usually liable for the corporation's unpaid taxes.

However, employers are required to withhold employment taxes such as federal income tax, unemployment tax, and Social Security tax. If those taxes aren't paid to the IRS, classification as a corporation will not protect the unlucky individual in charge of managing withholdings from tax liability. The "responsible person" can be held personally liable for the corporation's unpaid employment taxes.

So, unless your business is a corporation, you will probably be liable for any unpaid taxes.

If you have questions regarding your business' tax liability, an experienced tax attorney will be able to help.

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