The 2nd Circuit Court of Appeals in McNamee v. IRS, No. 05-6151 just affirmed a federal trial court’s determination that the owner of an LLC (limited liability company) can be held personally liable for unpaid payroll taxes. This is a significant decision, which may well be appealed to the Supreme Court. Meanwhile, let’s look at its significance. People form LLCs and corporations to avoid personal liability for the debts of the company. Payroll taxes present a slightly different situation because an officer (but not director or shareholder) of a corporation or LLC who is responsible for payroll can be held personally liable for not forwarding the part of payroll taxes that’s withheld from an employee’s paycheck. That’s called the “trust fund amount.” But that’s not what we’re talking about here. Here we’re talking about the whole payroll tax amount, both the trust fund amount AND the part the employer pays, which normally is a corporate or LLC debt and the owners (shareholder or members) of the corporation or LLC is generally not liable for that.
C-corps and LLCs have limited liability. The difference is…C-corps have a solid track record in the court system, while LLCs are still growing. My notion is that people form LLCs after being sold on the pass-through tax benefits, not the limited liability aspects of the entity type. They funnel expenses through, never realizing that legitimate business costs are already personally deductible. And if they actually do get serious about their business and it winds up an acquisition target, they’ve got a big mess to clean up before that sale.
Not to mention the little messes like becoming case law.