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Liability of Members of Limited Liability Company for Employment Taxes

Limited liability companies (LLCs), like all other employers, are required to withhold and pay over employment taxes to the federal government. States that authorize the creation of limited liability companies (LLCs) generally provide that the members (owners) of the LLC are not personally liable for the debts of the business in their capacity as members. The question then arises as to whether the Internal Revenue Service is allowed to collect any unpaid federal employment taxes owed by a LLC from the LLC members as if they were general partners of a partnership.

When an LLC has more than one member, it is automatically classified as a partnership for federal income tax purposes unless the business elects to be taxed as a corporation. Under general partnership law, the general partners are jointly and severally liable for the partnership obligations, and it has been determined that the IRS can collect unpaid federal tax liabilities from the general partners. However, under most state statutes, the members of an LLC are not liable for the LLC debts. In order to resolve this conflict in the law, the IRS has determined that in a situation where members of an LLC are not liable for business debts under state law, then the IRS cannot collect the LLC’s employment tax liability from its members nor can it levy on the property and rights to property of the members.

However, the IRS also concluded that there might be circumstances under which the LLC members were exposed to liability for the non-payment of employment taxes. These special circumstances include the fraudulent transfer of assets from the LLC to its members.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.

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