LLC Taxed as Partnership Exposes Owners to Liability
A while ago I posted about a law suit involving an LLC, the IRS and personal liability for the owners. I'm still hearing people talk about choosing the LLC format without any idea of why, other than it's really popular now. So I thought it was time to mention this problem with LLCs again.
If an LLC chooses to be taxed like a partnership (which is the default setting) the IRS will tax it like a partnership. Which to most people means... it's a "flow through" entity, doesn't pay taxes itself (except perhaps for some annual minimum franchise taxes) and all of the income "flows through" to the owners who are taxed directly for their share.
That's true, as far as it goes. But that only applies to income tax. What about payroll taxes? If the LLC has employees, and admittedly not all do, it will also pay payroll taxes. If the company fails to pay those payroll taxes, it's the IRS' position that, hey, you chose to be treated like a partnership "for tax purposes" and payroll taxes are taxes, therefore, bingo, you are personally liable, as a partner would be for payroll taxes (it would seem this argument could also apply to sales and property taxes in states where the language of their comparable LLC laws allows the choice of being taxed as corporation or "as a partnership."
This is certainly not the only consideration in choosing whether to form an LLC or Corporation and if an LLC, whether to be taxed as a corp or partnership, but it should be thrown into the decision making process.
