By Evan Pillsbury on Sep 25, 2018 11:28:31 AM
Forming a Limited Liability Company (LLC) for your business can personally protect you against debts that your business incurs, including debts arising from unpaid payroll taxes. But, what if you're a single-member LLC that did not make an election for how the business would be taxed? Do you still have the same personal protection from payroll tax debts?
Let's first dive into the check-the-box regulations for LLC's. It's important to know that the forming of an LLC is not recognized under federal tax law. Simply put, the IRS really only cares how the LLC is going to be taxed. According to Treasury Regulation ("Treas. Reg.") § 301.7701-3(a), "A business entity that is not classified as a corporation can elect its classification for federal tax purposes."
So, when choosing how to be taxed, a multi-member or single member LLC can elect to be taxed as an S-corporation or C-Corporation. A multi-member LLC can also elect to be taxed as a partnership. What happens though if you don't check-the-box to elect how the LLC will be taxed?
Multi-member LLC's that do not make an election are automatically classified as a partnership for federal tax purposes. But, unlike a traditional partnership, the partners are not liable for any employment tax debt should it arise. The partners can however be assessed the trust fund recovery penalties if any are assessed.
Now, if a single-member LLC does not make an election, the LLC is automatically classified as a disregarded entity.
LLC's As Disregarded Entities
An LLC that is classified as a disregarded entity retains all the same characteristics of a sole-proprietorship for federal tax purposes except in the area of employment taxes and certain excise taxes. This means the business will still file a Schedule C each year and if it has employees it will still be required to file it's 940 and 941 payroll tax returns.
Because the LLC is being classified as a disregarded entity (sole-proprietor) for federal tax purposes, the LLC will be disregarded and the single member will be held personally liable for any tax debts incurred by the business. However, when it comes to employment tax, the single-member of the LLC is afforded the same protections as if it were a corporation according to Treas. Reg. § 301.7701-2(c)(2)(iv), which became effective January 1, 2009. What this means is that the single member of the LLC, classified as a disregarded entity for tax purposes, cannot be held personally liable for any employment tax debt but, they can be personally assessed for trust fund recovery penalties.
If you feel as though you cannot be personally assessed for employment taxes that were supposed to be paid by your LLC, you are correct. However, you are still able to be personally assessed trust fund recovery penalties. It's also important to be aware of the check-the-box regulations for the simple fact that you want to make sure you are being taxed properly. You certainly wouldn't want to be taxed as a partnership if you were intending the LLC to be taxed as a corporation. When deciding how you would like your LLC to be treated for tax purposes, consult with a tax professional. They will be able to go over in greater detail what the pros and cons of each election have to offer.