Case Study: Arthur formed a corporation called Pick-Ups, Inc. Arthur was the corporation’s sole director, officer, and shareholder. The federal government sued Arthur, his wife, and the corporation to collect federal taxes. The court found the corporation was Arthur’s alter ego following state law. Why? Because there was such unity between the corporation and Arthur that the separateness of the corporation had ceased. Arthur intertwined personal and business activities to the extent that the court reasoned to hold only the corporation liable for the payment of federal taxes would be an “injustice”. The court relied on undisputed facts showing Arthur exercised complete control over the corporation, failed to observe corporate formalities, loaned substantial sums of money to the corporation, and made personal loan payments from the corporation’s bank account. The court found Arthur was personally liable for $1,777,047.00 in federal taxes owed by the corporation.*
Takeaway: The $1.7 million judgment against Arthur is a good reminder that business owners, especially sole shareholders or sole members of single-member limited liability companies, should adhere to barriers between their personal and business affairs and comply with all corporate formalities to avoid personal liability for business debts and obligations.
A review with your attorney of your business’ operations including the proper records to have and how to consistently maintain records separate from your personal activities is essential to minimizing personal liability.
If you have not reviewed your business operations with your attorney, or it’s been more than one year, do yourself a favor and arrange a discussion with your attorney and CPA before the year end. If we may help, contact Stross Law Firm at 813-852-6500 to arrange a time to talk with one of our business attorneys.
*United States v. Lothringer, No. 20-50823, 2021 WL 4714609 (5th Cir. Oct. 8, 2021)