What If I Do Not Pay My Payroll Taxes

What if I don't pay my payroll taxes? We were asked this payroll question recently, and here's our answer: you should never ever fail to pay your business payroll taxes!


What happens if I don't pay my employer payroll taxes or my withheld employee payroll taxes?

When asked this question recently by a small business owner, we were shocked to think that somebody might think they could get away without paying payroll taxes.

It's very important to pay your payroll taxes because you will be held personally liable for them, even if you think you have limited your liability through your company's legal structure.

Personal Liability for Payroll Taxes

The federal tax code imposes personal liability on any "responsible person" who fails or refuses to collect and pay the required taxes.

A responsible person includes someone who controls the employer's money, has signature authority on a payroll account or is a corporate officer.

As outlined in Section 6672 of the Internal Revenue Code, the responsible person is personally liable for a 100% payroll penalty for any failure pay withheld taxes from employees. In other words, you personally will owe the IRS all of that money.

Note that this is for employee payroll taxes that you have withheld, not for the employer payroll taxes. The covered employee taxes include federal withholding and the employee FICA and Medicare taxes withheld.

Bankruptcy Won't Get Rid of Your Personal Liability for These Debts

A scenario in which a business owner might be tempted into not paying payroll taxes owed is when things are really tight.

Instead of missing a payroll or an important vendor payment, a desperate business owner might use the withheld payroll taxes from a previous payroll to pay current obligations.

You should never do this. If the business is struggling that much, a bankruptcy filing may be around the corner.

While filing for company bankruptcy will stall and/or eliminate many business debts, the IRS has taken steps to ensure that your debts to them will not go away.

Obligations to government agencies for taxes, interest and penalties survive bankruptcy proceedings.

You can close the company down and distribute assets to creditors on a pro rata basis, but you will need to pay the government in full, even if it comes out of your own pockets.

You can even go to jail if you fail to live up to your tax obligations, and ignorance or mistakes are no excuse in the "eyes of the government" for your not paying correctly.

So, a word to the wise – treat your payroll tax obligations to the IRS as sacrosanct. As tempting as it might be to use that money for other purposes, don't do it

If you find youself in a Payroll tax bind, contact me at (800) 730-5691 or The Out-House General Counsel.

12 Reasons for A Startup Not To Be An LLC

12 Reasons for a Startup Not To Be An LLC

By:  Davis Wright Tremaine 's Startup Law Blog

Jewels of Change: Lady Lawyers Impacting the World

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Small Business Horror Story #1: Shady Partner + Generic Operating Agreement = Disaster

This is a re-post from one of my favorite Business Attorneys (other than myself) Gina Bongiovi out of Las Vegas, Nevada.  She tells a story I have come across all too often.

When I sign a new monthly retainer client, I always conduct what I call a "legal checkup" on the business.  I review the company's formation, licensing, employee or contractor agreements, lease agreements, service agreements, etc. to find ways I can better protect the company and its owners. 

Wait, let me clarify.  I *request* these documents in order to review them.  Often, it takes the owners a while to gather all the information to give me and sometimes they simply ignore my requests, preferring that I instead put out fires.  While I'm great at putting out fires, my real value lies in working proactively - modifying these documents to better protect the company before a fire breaks out.

One particular client was in an LLC with another person.  We'll call them Jack and Bill.*  Jack requested the initial meeting with me, apparently without telling Bill.  Bill walked in during our meeting, demanded to know "who the hell" I was, and threw a fit, yelling at the top of his lungs that "we don't need no &*%$ attorney!"  Following that outburst, I gently asked Jack to send me a copy of the company's operating agreement.  He said it was the one that came with the corporate binder he got when he formed the company and he had no idea where the binder even was.  Seeing the writing on the wall, that this partnership was going to crumble sooner rather than later, I made a more urgent request to see the operating agreement.  And I requested the operating agreement every few days for the next two months with no response.

A month ago, Jack called to say Bill was leaving the company.  I again asked for the operating agreement to make sure Bill's exit was in compliance with its terms.  I also suggested that Bill be removed as a signer on all company bank accounts as soon as humanly possible.  No response.  

Last week Jack called in a panic.  While he was at the bank removing Bill as a signer on the account, Bill was at a different branch, withdrawing $21,000 in cash from the company's checking account.  

Because Bill was still a signer on the account, the bank had no choice but to give him the money.

Because the operating agreement didn't restrict an LLC member's ability to take money out of the account, Bill didn't breach any agreement.

And because Bill pulled the money out in cash, there was no way to stop payment.

Jack's only option would be to file a lawsuit against Bill, hope that he wins, and then hope that he could collect the money.  Of course, a lawsuit would drag on for months and more likely years, tying up company resources in what is probably a losing battle.  Plus, even if Bill lost, he could file bankruptcy and then the company would have lost the original $21,000, plus attorney fees, plus time lost while embroiled in a lawsuit.

Lessons learned:  

1) make sure your operating agreement is thorough and addresses issues like when a member can take money out of the account,

2) if someone leaves the company, remove them from the bank account IMMEDIATELY.  Unless you notify the bank that someone is no longer an owner, the banker has no way of knowing not to give an owner access to company funds. 

* Names have been changed to protect the innocent.

You can read Gina's original post at Shady Partner + Generic Operating Agreement = Disaster

If you have any questions or concerns about any of the above, you can contact me at (800) 730-5691 or The Out-House General Counsel.  

Saturday Academy of Law’s Fourth Commencement

The UCI Saturday Academy of Law staged its fourth commencement ceremony Saturday.  The 60 Santa Ana ninth graders were encouraged in their academic pursuits by the experiences of Dean’s Cabinet member Daniel J. Alexander II, the keynote speaker.  All graduates received a pocket copy of the U.S. Constitution, and will be followed by UCI undergrad mentors throughout their high school careers.

Half these ninth graders were taller than me, can you pick me out?

Top 10 Typical Labor Law Faults Done By Companies

The contemporary American workplace is susceptible to numerous federal, state, and local laws and regulations that impose strict obligations on businesses (e.g., wage and hour legal guidelines, nondiscrimination laws and regulations, etc.). Most companies, especially smaller organizations, tend not to know the scope of such obligations and, consequently, frequently (albeit inadvertently) violate legislation. These violations can cause costly lawsuits, and also civil and criminal penalties. In my experience of being a defense attorney in addition to being a plaintiff's lawyer, the most frequent employment law mistakes done by corporations are these (in no particular order): 

- Wrongfully classifying workers as independent contractors. Generally, only workers who operate their unique separate corporations are "independent contractors." Few workers meet this test; in reality, most personnel are considered "employees" for the law, meaning these are eligible to the total variety of workplace protections.

- Wrongfully classifying non-exempt personnel as exempt. Generally speaking, all workers are eligible for minimum wage and overtime pay, unless these are "exempt" under state and federal law. The exemption rules (e.g., for executive, administrative, and professional staff members) only apply in limited circumstances, however; therefore, many staff members who're claimed by businesses to become "exempt" in reality have entitlement to minimum wage and/or overtime pay.

- Not complying with state wage payment laws and regulations. i.e. New York imposes several specific rules regarding how businesses be forced to pay their staff members. These rules include providing new personnel with written notice of the rate of pay and regular pay date; prohibiting deductions from wages unless for that employee's benefit and authorized in writing; requiring written contracts for commissioned salespersons; and providing terminated workers with written notice of the last day's work, their last day's benefits, and their right to make an application for unemployment benefits.  (Make sure you are aware of your state's specific rules).

- Not owning an employee handbook. A personnel handbook is a vital tool for effective employer-employee relations. It notifies personnel of the company's values, policies, and procedures; promotes compliance with labor and employment legislation; so it helps create an orderly, efficient, and transparent workplace.

- Not documenting employee job performance. A well-managed organization clearly communicates its employees' duties and responsibilities (e.g., through written position descriptions), trains and supervises workers to be sure they are meeting these requirements, and offers regular, objective, consistent feedback (e.g., through written evaluations and, where necessary, disciplinary actions). A deficiency of accurate, complete, contemporaneous documentation can cause liability in the case of a case by a staff member.

- Not training supervisors regarding EEO laws. Federal, state, and local equal employment opportunity (EEO) law regulations prohibit businesses from taking adverse actions against staff members (e.g., demotion, termination) for reasons not linked to an employee's job performance, including those according to an employee's race, color, sex, age, disability, religion, national origin, sexual orientation, and marital status ( to mention the most typical "protected characteristics"), plus retaliation for an employee's good faith complaints of discrimination. It is imperative that supervisors learn the way to manage personnel without violating (or appearing to violate) these law regulations.

- Not providing reasonable accommodations for disabled personnel. Most EEO law regulations prohibit businesses from taking adverse actions against employees depending on certain protected characteristics, but disability discrimination legal guidelines also impose an affirmative obligation on businesses to "reasonably accommodate" disabled workers in an attempt to make them perform the fundamental functions of these jobs. Such accommodations can include restructuring job duties, modifying work schedules, or providing assistive devices. Businesses must give a disabled laborer with needed accommodations unless this would cause an "undue hardship" for the company (e.g., very costly, too disruptive).

- Not obtaining releases from terminated staff members. When terminating a worker, businesses need to get a release that waives the employee's potential legal claims against the enterprise. The simplest way to get a release is in exchange for an offer of severance (where appropriate). Normally, companies are not necessary to pay for severance to staff members (unless essential to an employment contract or possibly a collective bargaining agreement). If they opt to do this (e.g., in association with layoffs), they must require personnel to sign a release in return for the payment.

- Not protecting confidential business information. Every organization depends upon certain vital, often confidential, information regarding its company operations, including trade secrets, marketing and advertising practices, and customer and client lists. Access to this information must be restricted to personnel with a "need to know" and may be protected by appropriate non-disclosure, non-compete, and/or non-solicitation agreements (depending on the nature of the information along with the employee's position).

- Not consulting an experienced employment law attorney. Perhaps the one most critical point to take away from this discussion is always that businesses must consult an experienced employment lawyer to ensure they are in compliance with all the increasingly numerous and complex legislation that carpet work just like a minefield. Large organizations will often have attorneys and hr professionals working to help them in this field. Small- and medium-size companies often don't. Their biggest mistake is wanting to navigate this minefield automatically.

And also you? What exactly are your top mistakes made in employment law?

The author Stacia Abner writes her blog, http://www.employmentlawtraining.org/, to help the public get all the information they need to raise awareness on labor rights and employment law and its associated benefits to support workers and companies on a daily basis.

Corporate Record Keeping - Company Records Explained

This article was originally posted by Imke Raschko of New York, but it is applicable to Corporate Record Keeping anywhere.  It is a real back to basics post and I hope you enjoy it.  If you have any questions about your corporate record keeping, do not hesitate to contact me at The Out-House General Counsel or (714) 432-6370.

To view to article hit this link Corporate Record Keeping Explained.

How is the Out-House General Counsel different from other "Business Attorneys?"

I have created an "out-house general counsel" model.  The idea behind it is simple.  I offer my business clients a variety of "in-house" type legal services from an experienced attorney in a manner that fits their budget and improves the level of legal service delivery to the client.  I am not a total replacement of the company's outside law firm, instead I do most of the work in-house at a far lower cost than variable hourly rate firms.  Most importantly, I always approach legal issues from a "business" perspective.  What makes perfect "legal" sense doesn't always make "business" sense.  My goal is to take both a "legal" and "business" perspective when providing out-house general counsel services to my clients.

My clients have a dedicated attorney who takes the time to understand their business from the inside out, and knows how to work with businesspersons on achieving result-oriented otucomes.  I offer flexible billing models, including fixed-fee monthly membership programs, for clients who want to limit their exposure to legal fees and be able to budget accurately.  Because my model is streamlined with very limted overhead, the cost of my legal services is much lower then traditional firms.

All the major corporations in the United States have "legal departments" to handle the legal aspects of running their businesses.  Your business has the same legal needs as the big guys.  Contact the The Out-House General Counsel for a free consultation. 

What Issues, Opportunities and Risks Face Business Owners in 2011

As a General Counsel to business owners, I am often asked my opinion about opportunities and risks that business owners should be aware of as the new year approaches.  In this down economy, there are a lot of opportunities for businesses with some liquidity to acquire distressed assets with appreciating potential.  There are also a lot of quality labor talent willing to work for less.  These economic times also make current and former employees more apt to sue you for wage disputes.  Regulators are also coming down on wrongfully classifying Independent contractors.  Finally, technology has created employee privacy issues that need to be addressed.  These are just a few of the opportunities and risks that are out there.

             

Buy Your Own Building.  With commercial property prices hitting rock-bottom, it's a great time for owner-operators with some capital to buy their own buildings. It will be an investment with a big long-term payback. Clients of ours who did this in the last downturn in the 1990's are collecting big checks now.

Finding tenants for any unoccupied space will not be easy if you don't use the entire building. You can overcome this by sweetening the deal to include giving potential tenants a small equity stake - after paying yourself a preferred return on your invested capital. Finding financing will be difficult but not insurmountable, especially if you have a decent balance sheet.

Upgrade Your Talent.  Take advantage of the deep pool of talented and hungry job applicants to upgrade your labor force. Spend more time evaluating the performance level of your current employees. Compare them with the available talent and make appropriate changes. Given the high quality of job applicants, it's unlikely that you'll have to pay more for more talented and motivated workers.              

Independent Contractors.   Many businesses have reduced costs by hiring as independent contractors workers that should legally be classified as employees. This saves on tax payments, unemployment compensation, workers compensation, benefits and other employment-related costs. But regulatory agencies are being pressed to generate revenues. For them, going after companies for wrongfully classifying employees is low-hanging fruit. Expect a greater level of scrutiny in this area. Take a hard look at your contractors. If they don't qualify, convert them to employees before you feel the lash of the regulator's whip.

Employee Privacy and Technology.  What can an employee say about you on Facebook, Twitter or a blog? Can you ask for passwords? Can you fire them for negative content? Get them to change it? What if it contains misinformation or confidential information? These are just a few of the many issues blossoming with the increasing uses of social media websites and the technology that is spreading it. If you haven't thought about them you'll need to - and develop new policies or upgrade existing policies to minimize the risks.

  

Non-Wage and Hour Class Actions.  Wage and hour violations have been so much the subject of class action lawsuits that new cases for plaintiff's lawyers are harder to come by. This group is now starting to focus on working condition class actions, which may be the next wave of cases. Portending this is Currie-White v. Blockbuster Inc, a 2009 case on the employer's failure to provide seats for its cashiers. The plaintiff's lawyers are after penalties, which potentially are $100 per employee per pay period for the first pay period and $200 for each subsequent pay period. Other potential violations are the failure to provide suitable lockers or closets, changing rooms or "suitable resting facilities". It's a good time to review the wage order applicable to your business to make sure your working conditions are compliant. 

I would like to thank Gerald D. Block of The General Counsel, LLC for bringing these risks and opportunities to light in his newsletter.  If you have any questions or concerns regarding any of the above, please contact me at The Out-House General Counsel or press the call me button on my blog.

Do Friends Make Good Business Partners

Do Friends Make Good Business Partners? No.  For a closer look at this issue, please follow this link http://klplaw.blogspot.com/2010/12/do-friends-make-good-business-partners.html.  It is a great post by a like minded Small Business Attorney in Georgia.  Her name is Ms. Dar'shun N. Kendrick and she can be contacted at dkendrick@kendricklaw.net.  If you are in California and have any business law issues, please contact me at (951) 737-4040 x1 or Daniel J. Alexander II.