It is common practice for individuals seeking a “corporate” shell for their new business to organize a limited liability corporation (LLC) instead of incorporating. Under the IRS’s Check the Box Rules, the individual may elect S corp, C corp, or “entity disregard” treatment for tax purposes. The latter election treats the LLC for tax purposes as if it does not exist. All profits, losses, depreciation, amortization, etc., pass through directly to the owner’s Schedule C.
This election removes the requirement that the LLC file an informational return and instead requires the owner/taxpayer to include the information and amounts on his or her personal federal tax return. In effect, an entity-disregard LLC is a sole proprietorship for tax purposes. Making this election, however, now has some perils. In Littriello v. United States, a federal court in the Western District of Kentucky recently upheld the tax liability of the sole member of an entity-disregard LLC for unpaid withholding and FICA taxes not under the traditional “controlling person” standard, but rather merely as the owner of the entity. That is, the IRS did not look to see whether the taxpayer had the right to deposit and sign checks and withdraw cash from the LLC’s bank account; it was enough that the taxpayer owned the LLC.
In the Littriello case Mr. Littriello was held personally liable by the IRS for the failure of his LLC, Kentuckiana Healthcare, LLC, to remit collected FICA and withholding taxes to the IRS. The IRS pursued him under the theory that because the entity was disregarded under the Check the Box Rules it was operated as a sole proprietorship thereby making Mr. Littriello personally liable for unpaid withholding and FICA taxes. The IRS looked through the entity’s separate legal existence to impose liability upon Mr. Littriello not because he, as an officer of the entity, failed to remit the taxes but instead merely because he was the sole owner of the LLC. If you are planning on using an LLC and there is to be just one owner, it may be preferable to elect to be treated as a S corporation. An S corporation election may reduce the risk of becoming personally responsible for the LLC’s tax obligations. At a minimum, you should consult with your accountant or tax attorney before making a Check the Box election.« Back to news