C-Corp being shut down with an unpaid corporate income tax balance

It's more complicated than simply yes or no.

In general the liability owners of a corporation is limited to their investment in the corporation. In other words, they are not normally personally liable for the debts of the corporation - even taxes.

But there are some circumstances where they may be liable. The most common with respect to taxes is that anyone who is responsible for collecting and paying over taxes (e.g. withholding taxes and sales taxes), can be held personally responsible for those unpaid taxes.

A shareholder in a corporation can also be responsible if he received money from the corporation, as a shareholder, while some of the corporation's creditors got less than they were owed. The shareholder might be responsible for paying back what he received, but not more than that.

And if a shareholder failed to segregate his own assets from the corporations, and used corporation assets as his own, he may be personally liable for the corporation's debts to the extent a court finds it equitable.

As long as he takes no assets from the corporation, he should be allowed to do that. However corporate assets include not only the name but the phone number and client list as well.

One thing he could do is to have the corporation file a chapter 7 bankruptcy. Corporate debts are not discharged in bankruptcy, but their assets are liquidated. Once he files and there is a bankruptcy trustee, he could buy corporate assets (name etc.) probably for a pretty low price, and then continue in business as before. I think that would be the safest way to do it.

Are these unpaid taxes corporate income tax or withheld income tax? If the latter, there's nothing your client can do to get out from under them other than pay up.

It is both. He understands about the withholding taxes and is paying those.

The real question is the unpaid corporate income tax. From what I can see, the only way out of the corporate income tax is for the corporation to file bankruptcy or to file a Business OIC. The first reply to my post said that a Chapter 7 corporate bankruptcy was the safest way. Does anyone have any other input on this?

Thanks.

---Chris Johnson, EA in NJ

I already gave you a fairly complete response. Perhaps it was too complete. Here it is short and simple:

1. Normally the owners/officers/employees are not personally responsible for a corporation's income taxes.

There are limited but complex situations when shareholders can be held liable for corporate debts. You should talk to a lawyer to determine if your situation fits into one of them.

1. Filing bankruptcy for a corporation does absolutely nothing - corporate debt does not get discharged in bankruptcy. If the corporation has no assets and you simply close it, bankruptcy will gain you nothing at all.