New 6/8/12 Updated 9/27/17
Limited liability company (“LLC”) members are generally NOT liable for LLC obligations and liabilities unless: 1) they guaranty them; 2) the member fails to respect the LLC separateness (treat the LLC’s money or assets as the member’s own); 3) the piercing the veil doctrine applies; 4) their personal action or inaction creates the liability (e.g., driving an LLC vehicle involved in an accident); or 5) there is another provision imposing liability.
The Missouri Administrative Hearing Commission (“AHC”) issued a decision in Oliver and Crask v. Director of Revenue, Case No. 14-1221 RS, on September 13, 2017, upholding personal liability of members of a Limited liability company (“LLC”) taxed as a partnership for unpaid sales tax, even though the members had no control over finances or ability to insure the taxes were paid.
In the Oliver, the LLC operated a restaurant. Oliver was a member and bar manager, and Crask was a member and head chef. The LLC was member managed, but the operating agreement required that a third member owning a majority member interest approve any business decision. Neither Oliver or Crask made a financial contribution to the LLC, or ever received a distribution from the LLC. Both Olive and Crask could sign checks, but rarely did, and then only to pay vendors. The third member was responsible for filing returns and paying tax. Neither Oliver nor Crask were aware taxes were unpaid. The restaurant eventually closed, but neither Oliver nor Crask were part of the decision to close.
The AHC rejected Oliver’s and Crask’s argument that R.S.Mo. §144.157 required that they have “direct control, supervision or responsibility or filing returns and making payment” for them to be personally liable for the unpaid sales tax. The AHC held §144.157 only applied to corporations, and not to LLCs taxed as partnerships. The AHC also held that §347.187.2 requires LLCs to be classified and treated for sales and use tax purposes consistent with the LLC’s federal income tax classification, i.e., as a partnership. R.S.Mo. §358.150.1 provides “all partners are liable jointly and severally for everything chargeable to the partnership pursuant to sections 358.130 and 358.140, and for all other debts and obligations of the partnership.” Consequently, as LLC members, Oliver and Crask were personally liable for the unpaid sales tax.
The Missouri Division of Employment Security (“Division”) does not have a “responsible person” statute applicable to corporations, but also asserts §347.187.2 makes members of LLCs taxed as partnerships liable for unpaid unemployment contributions.
This makes it important for members of an LLC operating a business to confirm sales and withholding taxes, and unemployment contributions, are paid, even if they have no authority to control payment.
This limited liability is set out in R.S.Mo. §347.057:
A person who is a member, manager, or both of a limited liability company is not liable, solely by reason of being a member or manager, or both, under a judgment, decree, or order of court, or in any other manner, for a debt, obligation or liability of the limited liability company, whether arising in contract, tort of otherwise or for the acts or omissions of any other member, manager, agent or employee of the limited liability company.
The IRS respects this liability limitation. Members are not personally liability for unpaid withholding tax unless they are determined to be a “responsible person” under Internal Revenue Code §6672, with a duty to collect and pay over taxes, and who “willfully” fail to do so. Missouri has similar statutory responsible person liability for sales and withholding tax, but not for unemployment contributions.
The Missouri Department of Revenue (“DOR”) and Missouri Division of Employment Security (“Division”) position is that members of LLCs taxed as partnerships are personally/individually liable for unpaid LLC taxes to be paid or collected by the LLC, i.e., DOR withholding and sales tax, and Division unemployment contributions, without resorting to responsible person personal liability. DOR’s and the Divisions positions are that limited liability is trumped by R.S.Mo. §347.187:
1. A limited liability company created pursuant to sections 347.010 to 347.187 or entering the state pursuant to sections 347.010 to 347.187 and its authorized persons, or their equivalent, shall have the duty to withhold and pay such taxes as are imposed by the laws of this state or any political subdivision thereof on a basis consistent with such limited liability company’s classification pursuant to Section 7701 of the Internal Revenue Code of 1986, as amended.
2. Solely for the purposes of chapter 143, R.S.Mo., chapter 144, RSMo, and chapter 288, RSMo, a limited liability company and its members shall be classified and treated on a basis consistent with the limited liability company’s classification for federal income tax purposes.
Thus, if an LLC is taxed as a partnership (versus taxed as a “C” or “S” corporation) LLC members are treated as general partners liable for tax owed by the LLC itself. DOR appears to accept that an LLC member treated as a limited partner (versus general partner) is not liable. Limited partnership general partners manage and control the limited partnership business and affairs, and limited partners do not have that authority, so cannot make sure the taxes are paid. All members in a member managed LLC can act for the LLC, similar to general partners, but non-manager members in a manager managed LLC are without authority, similar to a limited partner. Management authority is set out in the Articles of Organization as “member managed” or “manager managed”. The extent and limits on manager authority is further set out in the LLC Operating Agreement. Also, there are two checkboxes on the LLC form K-1 sent to members each year with the LLC filing the form 1065, marked that the member is either a “general partner -LLC member” or “limited partner – LLC member”.
This potential liability is reason for member diligence, especially for members not active in operating the LLC business in ensuring taxes are paid, and possible reason to consider another form of entity such as a “C” or “S” corporation.