CASWELL BELL & HILLISON LLP
FRESNO, CALIFORNIA

LLC OWNER LIABLE FOR EMPLOYMENT TAXES

Sean was the sole owner of an accounting firm that was set up as a limited liability company (LLC) under state law.  When the firm went out of business, it had not paid any payroll taxes for the preceding 18 months.  Perhaps thinking that an accounting business, of all things, should have stayed current in its payment of payroll taxes, the IRS went after Sean personally for the $65,000 in unpaid taxes.  A federal court upheld a judgment against him.

Other published decisions reach the same conclusion.  In L & L Holding Company, L.L.C. v. United States of America (U.S. District Court, W.D. La. 2008), the court held that the owners of a limited liability company were liable for unpaid payroll taxes because the entity was not taxable as a corporation. 

The authority of the government to look to the business owner in his personal capacity for satisfaction of the tax liability went back to the formation of the business.  Treasury Regulations (called the “Check-the-Box regulations”) allow an individual who is the only owner of an LLC to elect to have the business classified as either an “association” or a “sole proprietorship.” In the former situation, the entity is treated like a corporation.  In the latter case, the business is not considered an entity separate from the owner.

Personal Liability for Employment Taxes

The court’s logic seems inescapable: “In light of the above, we can say the following: Gonzales is the ‘employer’ under the employment tax statutes in the I..R.C. and thus responsible for the employment taxes.”

Explained the court, “As they existed during the periods relevant to this suit, the Check-the-Box regulations allowed a single-member L.L.C. to be treated as either a corporation (at the entity’s election) or as a disregarded entity (the default rule) . . . The regulations define the tax treatment of certain entities for all tax purposes, including employment tax purposes.  The plaintiffs ignore the facts that Gonzales was a limited liability company throughout the relevant periods.”

Regulations are Valid

The taxpayers challenged the tax assessment but to no avail.  The court rejected the argument that the Regulation imposing liability on him as an individual was invalid because the legislation itself, the Internal Revenue Code, does not expressly authorize imposing personal liability on the sole owner of an LLC.  The Regulations, like many others issued by the Treasury Department, are intended as a means to “fill in the gaps” left by the Internal Revenue Code.

The “Check-the-Box” regulations can be a double-edged sword.  When the taxpayer conducted business as a sole proprietorship instead of a corporation, he effectively agreed to be liable for the company’s debts, but he also had benefitted by avoiding the double taxation – once at the corporate level and once as an individual shareholder – that comes with treatment as a corporation.

© Caswell Bell & Hillison LLP          Attorneys and Lawyers, Fresno, California