Owning a business is exciting at times, frustrating at others, but always demanding. There are so many decisions to make on a daily basis, and often, as a business owner, you not only have to make the decisions, but must also roll up your sleeves to make those decisions bear fruit. One decision you should make early as a business owner is determining who will be your trusted advisors to guide you through the legal and accounting issues your business will encounter. Selecting a professional to assist you with legal and accounting decisions is vital to launching and maintaining a viable enterprise, because decisions made early in the formation of a business can have far reaching consequences down the road.
In my practice, I often see clients who chose to handle matters without engaging attorneys and accountants early in the process, and later failed to recognize issues as they arose during the day-to-day operations of the business. Those decisions can cost business owners far more money down the road than hiring the appropriate professionals in the beginning, and can have a significant effect on the ultimate success or failure of the business. I have found those mistakes fall into seven basic categories. This is Pitfall number 3 of 7 common pitfalls I see businesses owners make. Over the next few weeks, I will be sharing all 7 of these pitfalls and proven ways to prevent them.
Pitfall # 3 – Failure to Observe Tax Laws
Payroll Taxes – For some reason, when a company is experiencing financial distress the first thing it does is steal from its employees and the federal and state taxing authorities by failing to escrow and then remit payroll taxes. Make no mistake that is exactly what the company is doing if it withholds payroll tax from its employees and fails to pay it to the taxing authorities. It is not only bad form, it is a crime. The taxes withheld from employees’ pay are called the trust fund portion of the tax. The taxes the company pays as an employer on payroll are called the employer portion of the tax. There is a 100% penalty for business owners and other “responsible parties” who fail to remit the trust fund portion of the payroll taxes.
By way of example, if the company withholds $10 from Joe’s wages for payroll taxes and owes an additional $12 for the employer portion, but fail to remit $22 to the taxing authority, the business owners, officers, directors, payroll clerk, and anyone else the taxing authority determines is a responsible party will be held personally liable for 100% of the trust fund portion of the taxes, or $10, plus interest and other penalties. Do not mess around with payroll taxes. I advise my clients to always pay the government first. “Borrowing” from the withheld taxes to fund operations is a very slippery slope from which few business owners recover. If personal liability, inability to discharge such taxes in bankruptcy, and possible criminal charges is not enough, it can be a public relations nightmare as well. Tax liens are published in the local Business Journal for all to see. There is a simple solution. At a minimum set up separate bank accounts for the collection of payroll and sales and use taxes, and do not conduct business out of those accounts except for payment of those taxes. In addition, hire a reliable payroll service to remit employer and employee tax reports and taxes to the taxing authorities.
Sales and Use Taxes – Same song, second verse. Like payroll taxes, sales and use taxes are trust fund taxes which create personal liability for responsible persons and potential criminal liability. What’s more, failure to remit sales and use taxes is the fastest way to get a business shut down by the state taxing authority and company assets auctioned off to pay the back taxes.
Ashley focuses her practice on Outside General Counsel Services and Business Bankruptcy and Creditor’s Rights Practice Areas. She is an effective, results-driven advocate for her clients. Her background of 30 years in business bankruptcies, distressed debt workouts, problem loan recovery, and real estate title and commercial litigation provides her with a solid foundation of general business, accounting and legal skills.