In these difficult economic times it may be tempting for a business to use with funds it has withheld from the wages paid to its employees as federal income and employment taxes to fund its operations rather than depositing those amounts with the Internal Revenue Service. But the cost of doing so may be far more severe than the financial problems that caused the business to take such a course of action in the first place.
Businesses will often use pay payroll taxes as a last resort before their financial failure and collapse, and owners wrongly assume that such a course of action has little practical risk for them or their businesses. Yet, that sense of comfort is far from the truth. In fact, the failure to pay payroll taxes could very well result in financial disaster for a business owner(s). Not only can the IRS seek to recover unpaid payroll taxes (plus interest and penalty, where applicable) from the business, but it is also authorized to seek to recover those amounts directly from the owners and/or officers of a business who were “responsible” for collecting or paying payroll taxes—the so-called Trust Fund Responsible Person Penalty—regardless of whether such individuals personally benefited from those unpaid payroll taxes. And the IRS will pursue those individuals if a business repeatedly fails to pay payroll taxes. Further, if the business owner and/or officer is deemed liable for such unpaid tax obligations, the debt cannot be discharged through bankruptcy –so, it is a financial obligation upon such owner/officer until paid in full (with large penalties/interest).
PRACTICAL COUNSEL: Payroll taxes should not be thought of as a quick and cheap source of cash for an ailing business. Given the IRS’ vigorous efforts to collect unpaid payroll taxes, a cash starved business’ use of withheld payroll taxes to fund its operations will likely lead to its demise and the financial ruin of its owners.When buying or selling a business, there are generally two ways the transfer can occur, a transfer of the all (or substantially all) of the assets or a transfer of the equity in the entity that is operating the business. For convenience purposes, we’ll refer to the latter as stock transfer, which may include transfer of shares of stock in a corporation, membership interests in an LLC, or partnership interests in partnerships.