Guarantee a Loan
The reason small to mid-size business owners often incorporate is to limit liability but one way they can lose that is to guarantee debt.
Maybe that is not a failure because they did it on purpose but they certainly need to understand that at least for that loan or that contract they are now openly liable personally for that obligation.
The second is they get sloppy. I am the President of my corporation and when I sign any legal document it is Linda Keith, President, Linda Keith CPA Incorporated. If you get sloppy and start signing it personally, you might be personally liable.
Failure to pay payroll taxes
The last one might be a surprise and that is unpaid payroll taxes. Payroll taxes, at least in part, are withheld from the employee. They are held in trust until they are turned over to the federal government. So failure to pay payroll taxes isn’t just not paying your own expenses, but it is not turning over a liability that you incurred the moment you withheld it.
It doesn’t do you any good if you are an officer who delegates that responsibility to someone else. You may still personally be on the hook for any unpaid payroll taxes.
Lenders watch for red flags
In my training on tax return analysis we look at red flags and I’ll tell you, underpaid payroll taxes is certainly a red flag from two directions. One is the unpaid tax liability they have incurred because they have not turned that over. And the second is, if there is a company that can’t pay their payroll taxes that is a red flag all by itself.
What business owners need to know
So, owners that are trying to mitigate their risk by limiting liability need to know about these three ways they could fail to limit the liability.