The corporate entity has been with us a very long time. In fact, it is the standard business entity and the default choice of most publicly traded entities. There are many aspects of the entity that one can delve into, but one that doesn’t get enough attention is how shareholders can be pegged with liability for certain taxes, particularly payroll taxes.

The corporation is unique in the American legal landscape because of a piece of fiction. That fiction is the legal standing of the entity. It is considered to be a living person under the law. Courts have uniformly held that it has the same rights of a person. You might recall the general outrage that occurred when the Supreme Court ruled corporations could not be forced to limit their donations to politicians because it violated their right to free speech. This right to free speech arises from the entity being considered a person under the law.

Given this standing, you will often hear or read that the shareholders of a corporation can only be found liable for their capital contribution. This simply means that you only risk the amount of consideration you pay for the shares you own. For example, if I buy $1,000 of Google stock and the company goes bankrupt tomorrow, I can only lose my $1,000. This theory is generally true, but not always.

Payroll taxes are monies that a company is liable to pay on behalf of employees. A corporation must share in the tax liability of its employees. Problems arise, however, when a company is having cash flow problems and doesn’t make the payments. The IRS gets very hot and bothered by such situations. Let’s put it this way. Pit Bulls get scared. The agency views the failed payment as a theft and will literally raid businesses as a first step to collecting the debt.

Failing to pay payroll taxes is pretty much the last thing any business should do. Many corporations make the mistake, however. Then things get interesting for shareholders. While a shareholder is not typically personally liable for the tax debts of a corporation, they can be held liable for the payroll tax if they were in some way responsible for their collection and payment. My investment in Google is not going to get me in trouble, but the same is not true with most corporate entities. Most of them are small businesses where the shareholder(s) often are also involved in the daily running of the business. In such a situation, the IRS is going to try to nail each with joint and several liability for any payroll tax problem.

If you are the shareholder in a corporation, you should review your role in it. Any involvement in the issuance of payroll makes you personally liable if the company does not meet its tax payroll obligations.