How can you protect a new startup business from personal tax debt? So, to be clear, people and corporations are separate. If I’m sitting in front of you with a piece of paper right now, I draw a circle that represents a person and a circle that represents a business. So those two are separate.
Once a business entity is created, the personal tax liability associated with somebody else should not impact that business. It’s not like when you get assessed a tax liability, it can just skip over into an entity unless you had a pizza shop and you shut down the pizza shop and you opened up another pizza shop. That would be what we call a trans -reliability or an alter ego.
But in a case of a new business that doesn’t have anything to do with a delinquent personal or business tax liability, liabilities just don’t skip into businesses. The risk is when you have a situation where you have multiple partners, and one of the partners has a delinquent tax liability. The problem is, is when the IRS takes collection action against that person, they generally put a lien on them and when a lien does in the context of somebody owning a business is it attaches technically to the shares of that business.
Now that doesn’t necessarily have to prevent somebody who has a tax lien from owning a business, but it does potentially have consequences if and when that business is sold. So when you’re dealing with this It’s obviously very fact -specific. It depends on the size of the business, depends on the consequences, and the nature of the partners. But you want to make sure that you plan this out appropriately and that the person who has the tax liability is appropriately dealing with it.
And even if a lien is in place, the business can still be started. It just takes a little bit of time and effort and planning to get it done. So I encourage anybody starting a business, and particularly anybody who has historical tax issues, reach out to an attorney, do a consultation. Most of these issues can usually be resolved very quickly. But it’s important to do a little bit of planning work at the beginning so you understand what the impact would be on the corporation.