- Jurisdiction
- California
Hello, thank you in advance for reading my question, I appreciate the time of anyone who might be able to offer some baseline advice.
I'll try to keep it short and organized and I apologize if I don't have the correct language for some of my questions. I'll do my best.
The situation is this: Myself and one other person have worked for a small LLC for over ten years. Originally, we worked for three partners who held equal ownership of the business. Over the past two years however, one partner has passed away and the another has withdrawn their ownership due to health related issues (age and dementia). So there is currently a single owner of the LLC.
The single remaining owner is now offering to bring myself and the other long term employee on as minority partners, free of charge. They say as a "thank you" for our long term service and for keeping the business afloat and (even improving it) as they dealt with some pretty rough life circumstances. Specifically COVID, the death of their spouse, and the ailing of their long time friend (the two former partners).
The owner has offered us 15% stake each with the opportunity to buy a majority share in the future, as they wish to retire sooner rather than later. The business is profitable, the staff is like a family, we love what we do. It's "free." Those are the positives.
The difficult part is, as I understand it, we are each signing up for 15% of all assets and liabilities without a real clear idea of what those assets and liabilities are. We have viewed tax returns for the two years prior to COVID and the business was reporting about half a million in sales per year. We know generally what it takes to run the business, so we can see the profitability at least.
Unfortunately, the liabilities are a little hazy. Specifically, in 2019 the business was audited for sales tax years 2015/16 and it was determined that it had been significantly underreporting sales tax which has now resulted in a debt to the IRS for around $200,000 that we have yet to begin making payments on. Also there are some PPP loans (ideally forgiven) and a SBA disaster relief loan for over 100,000$ also hanging out there waiting to be be settled. So... it's a little tough to know what we're exposing ourselves to, and I don't really know the process to finding out.
Some basic questions:
If the LLC is in debt to the IRS for under-reported sales tax and we sign our names into the LLC, do we own that debt? Even though it was incurred before we were part owners?
Could the IRS come back and audit another prior year and would we, as new partners, be be liable for any debt from those back years as well?
If we do own prior tax debt incurred through previous underreporting, does the LLC structure protect our personal assets from the IRS? Let's say worst case scenario... COVID tanks the economy and the business shuts down entirely and the majority owner just goes AWOL, can the IRS come after the us as LLC owners for that unreported sales tax debt?
I know LLCs are supposed to offer protection... but then there's the whole piercing the corporate veil stuff... and it doesn't seem logical that the IRS would accept a bankruptcy claim and write off the debt?
Just to be clear, there was no criminal charges in the sales tax audit and the partner who under-reported sales to the IRS is no longer with the company, having passed away in 2020. (Though they were the spouse of the sole remaining owner.) I don't think the current owner is trying to screw us at all, I just think we are stepping into a situation that was very financially unorganized for many years.
Finally, if we become minority owners and the business ends up paying some or all of that tax debt from before we came aboard through future income, should that amount be taken into account if we decide to buy a larger percentage later?
If we pay a 200,000$ debt on sales tax from revenue that we had no access to, that seems like income for the person who did have access to that revenue. Basically, they made all the money in 2015/2016, we're paying the taxes, right?
It's a really tangled up situation, I know. I understand if it's too messy to offer any real advice, but I appreciate anyone who might be able to just tell me what to look for, how to protect myself, and maybe just a starting point in this whole process.
I'll try to keep it short and organized and I apologize if I don't have the correct language for some of my questions. I'll do my best.
The situation is this: Myself and one other person have worked for a small LLC for over ten years. Originally, we worked for three partners who held equal ownership of the business. Over the past two years however, one partner has passed away and the another has withdrawn their ownership due to health related issues (age and dementia). So there is currently a single owner of the LLC.
The single remaining owner is now offering to bring myself and the other long term employee on as minority partners, free of charge. They say as a "thank you" for our long term service and for keeping the business afloat and (even improving it) as they dealt with some pretty rough life circumstances. Specifically COVID, the death of their spouse, and the ailing of their long time friend (the two former partners).
The owner has offered us 15% stake each with the opportunity to buy a majority share in the future, as they wish to retire sooner rather than later. The business is profitable, the staff is like a family, we love what we do. It's "free." Those are the positives.
The difficult part is, as I understand it, we are each signing up for 15% of all assets and liabilities without a real clear idea of what those assets and liabilities are. We have viewed tax returns for the two years prior to COVID and the business was reporting about half a million in sales per year. We know generally what it takes to run the business, so we can see the profitability at least.
Unfortunately, the liabilities are a little hazy. Specifically, in 2019 the business was audited for sales tax years 2015/16 and it was determined that it had been significantly underreporting sales tax which has now resulted in a debt to the IRS for around $200,000 that we have yet to begin making payments on. Also there are some PPP loans (ideally forgiven) and a SBA disaster relief loan for over 100,000$ also hanging out there waiting to be be settled. So... it's a little tough to know what we're exposing ourselves to, and I don't really know the process to finding out.
Some basic questions:
If the LLC is in debt to the IRS for under-reported sales tax and we sign our names into the LLC, do we own that debt? Even though it was incurred before we were part owners?
Could the IRS come back and audit another prior year and would we, as new partners, be be liable for any debt from those back years as well?
If we do own prior tax debt incurred through previous underreporting, does the LLC structure protect our personal assets from the IRS? Let's say worst case scenario... COVID tanks the economy and the business shuts down entirely and the majority owner just goes AWOL, can the IRS come after the us as LLC owners for that unreported sales tax debt?
I know LLCs are supposed to offer protection... but then there's the whole piercing the corporate veil stuff... and it doesn't seem logical that the IRS would accept a bankruptcy claim and write off the debt?
Just to be clear, there was no criminal charges in the sales tax audit and the partner who under-reported sales to the IRS is no longer with the company, having passed away in 2020. (Though they were the spouse of the sole remaining owner.) I don't think the current owner is trying to screw us at all, I just think we are stepping into a situation that was very financially unorganized for many years.
Finally, if we become minority owners and the business ends up paying some or all of that tax debt from before we came aboard through future income, should that amount be taken into account if we decide to buy a larger percentage later?
If we pay a 200,000$ debt on sales tax from revenue that we had no access to, that seems like income for the person who did have access to that revenue. Basically, they made all the money in 2015/2016, we're paying the taxes, right?
It's a really tangled up situation, I know. I understand if it's too messy to offer any real advice, but I appreciate anyone who might be able to just tell me what to look for, how to protect myself, and maybe just a starting point in this whole process.