Risks in Dissolving a Business EntityTax Professionals' Resource
October 15, 2012 — 1,947 views
Risks in Dissolving a Business Entity
Most business entities are formed to protect individuals. While some entities, like sole proprietorships, offer little or no protection against personal liability, standard C corporations and LLCs do place a wall between the activities of the business and the assets of individual shareholders or members. Risks to individuals do exist with any business entity, however, and accounting professionals need to be aware of the ways in which individuals can be held responsible for business debt.
When a company actively operates, has sales, pays its bills and shows a healthy profit, individual liability problems rarely surface. However, when a business faces difficult times, and the decision is made to liquidate it, care must be used to protect the personal assets of the principal owners. Following are two examples of bad things that can happen to individuals when the decision is made to dissolve a business.
As previously noted, corporations and LLCs do limit personal responsibility and liability. However, when an entity is dissolved, someone will be made responsible for outstanding taxes. The IRS and individual states will first look to company officers, like the president, secretary and treasurer, if unpaid taxes exist after a business is dissolved. If no one will agree to accept personal responsibility for amounts due, taxing authorities may then look to corporate directors for payment. If this fails, the IRS and the states can actually issue tax bills to those persons the taxing agencies feel are responsible for payment of these debts. Federal and state tax liens and warrants can result, and the credit scores of those individuals targeted can be severely damaged. Anyone who attempts to dissolve an entity must first make sure that there are no tax liabilities that can be subsequently transferred to individuals.
Obviously, corporate vendors know the risks of sales to businesses without personal guarantees, so especially in the early stages of a business, personal guarantees for payment are often demanded. Even if a business has been in existence for many years, original individual guarantees may still exist and, if they do, they can still be valid. When a business is dissolved, and if there are unpaid invoices, vendors will check to see if their contracts were backed by personal signatures. If this is the case, these vendors will attempt to collect from those who have personally guaranteed payment. The fact that the business has dissolved does not in any way limit the liability of those who have signed personally.
The veil of a corporation or an LLC can greatly limit the financial exposure of the business founders, officers and directors, but it is the duty of the accounting professional to carefully study the potential liabilities of individuals that can result from the dissolution process.