Q: I have taken great pains to set up a corporation (or limited liability company) for my business because this shields me, the owner, from personal liability, right?
A: Unfortunately, the answer is not always yes. A business owner, or even a nonowner officer, can be held personally liable by both the state and federal government for failure to collect, withhold, report and pay both the employee and employer portions of income, unemployment, Social Security, sales and corporate franchise taxes.
In many cases, a significant penalty can be assessed (personally) in addition to the amount of tax owed.
Q: Who is subject to personal liability?
A: Any owner or officer of the business who exercises control or supervision over any tax and financial affairs of the entity; handles or supervises any disbursement of funds; or sets priorities of payments among creditors.
These individuals are known as responsible parties.
Employee federal tax withholdings
The responsible party is personally liable for any unremitted required withholdings (which include income, Social Security, unemployment, gambling winnings, interest and dividends subject to withholding, distributions from retirement plans, payment of interest and dividends to nonresident aliens/foreign corporations, disposition of a U.S. real estate property interest by a foreign person and various federal excise taxes), provided that the IRS can show that the employee willfully (which can include recklessly) failed to collect, truthfully account for or pay to the IRS. In addition to being personally liable for the amount of the tax, there is an additional penalty equal to 100 percent of the amount owed.
Ohio corporate franchise tax
Until this tax is phased out, failure to pay by any corporation conducting business in Ohio can result in personal liability, penalties and liens. Furthermore, both the responsible party and the corporation may be restrained from conducting any business within the state until all taxes, fees, penalties and collection costs are paid in full.
If your business has annual gross revenue/receipts in excess of $150,000, you must register by Nov. 15, 2005, for the new commercial activity tax, which is gradually replacing the corporate franchise tax.
Ohio sales tax and employee state withholding taxes
For failure to file required reports and/or pay the tax due, Ohio law imposes personal liability on any employee (as well as their supervisors) who directly prepares the reports and/or makes payments.
Ohio use taxes
This excise tax is levied on the storage, use or consumption of tangible personal property or on the benefit of any service provided that is not subject to Ohio sales tax. In this case, the seller (which can include salespersons, representatives, peddlers, canvassers, agents of a dealer, distributor, supervisor and/or employees), regardless of whether they make the sale on someone else∏s behalf, is personally liable for any uncollected or unremitted amounts. To protect yourself and your employees from personal liability in these instances, it is vitally important that adequate checks and balances are in place within your organization. Your attorney or accountant can offer valuable advice on how to establish them, as well as audit your current systems, to help educate and protect all persons involved. If you aren∏t the business owner, you may want to have a discussion with the owner to be sure you and others are protected.
As the business owner, you can ensure everyone gets the limited liability you thought they were getting when you set up your business entity.
Robert B. Barnett Jr., is the managing partner of Carlile Patchen & Murphy LLP, a Columbus law firm focusing on representing closely held businesses and their owners, with practice areas including business, litigation, employment/labor, real estate, construction, intellectual property, estate and tax planning. For more information, call (614) 228-6135 or visit www.cpmlaw.com.