When it comes to taxes, state puts limits on limited liability
Individuals could be held responsible for unpaid excise taxes
By David Kerr
Most businesses in the recreational marijuana industry have been structured as some sort of “limited liability” entity. They can be LLCs or corporations, and I have even run into a few limited liability partnerships out there. The reason is obvious: limited liability entities protect the members or shareholders from liability for the lapses, misjudgments, mistakes and wrongdoings of the company.
The company gets sued; they can’t come after your house. Someone drops a grow light on someone’s head; you aren’t going to end up in the poor house. The company goes belly up, leaving creditors holding the bag; they can’t come after your personal bank account. Your liability is limited by law, as long as you follow the rules and don’t get business finances intermingled with personal finances.
However, the limited liability protection these businesses have relied on until now has been significantly reduced when it comes to state taxes for a recreational marijuana company that goes out of business. The state wants that money, and if the business didn’t pay those taxes, business operators might be on the hook personally.
In Washington, a new section has been added to the state code that says when a limited liability entity with a marijuana business license has collected state excise taxes, has failed to remit those taxes to the Liquor and Cannabis Board and that business entity has been “terminated, dissolved, or abandoned, or is insolvent,” the board may pursue collection of the entity’s unpaid taxes and the penalties on those taxes, against any or all “responsible individuals.”
So are you considered a responsible individual? It turns out the term has a rather broad definition. A responsible individual includes any current or former officer, manager, member, partner or trustee of a limited liability business entity with unpaid trust fund tax liability. It also includes any current or former employee or other individual if that individual had the responsibility or duty to remit payment of the limited liability business entity’s unpaid taxes. If another limited liability business entity were involved directly in the management of the company as a member, manager or partner, then “responsible individual” also includes any current and former officers, members or managers of that limited liability business.
For a responsible individual who is the current or former chief executive officer (or the highest-ranking executive manager or administrator in charge of the company) or the chief financial officer (or the highest senior manager responsible for overseeing the financial activities of the company), personal liability for unpaid taxes applies regardless of fault or whether the individual was or should have been aware of the unpaid tax liability. For any other responsible individual, personal liability would apply only if he or she willfully failed to pay or failed to cause those taxes to be paid for the company.
So, what are the practical implications here? You might be thinking, “My little company isn’t some big behemoth corporation with CEOs, CFOs and an accounting department. It’s just me, my spouse and a few employees that pretty much run everything. Small potatoes, who cares?” Well, if things start going bad for the business, bills aren’t getting paid, the wheels are coming off and for some reason the taxes aren’t being paid (exactly the time the limited liability protection is supposed to kick in and save you from personal financial liability) then the “mom and pop” in that mom-and-pop business begin to look a lot like “the highest-ranking executive managers or administrators in charge of managing the company” and the people “responsible for overseeing the financial activities of the company” and those people have “personal liability for unpaid taxes regardless of fault or whether the individual was or should have been aware of the unpaid tax liability.”
Also, it is not unusual for a licensee to hire managers to run the day-to-day operations of the business, keep the books, pay the taxes and take care of things while the licensee retains the title of managing member or president. Also consider the situation where a licensee has sold the business but retains a residual 5-10% interest and serves as an officer or director, as often happens in this industry. In these situations, even though the person might not have had any day-to-day, hands-on responsibility, wasn’t aware that the person hired to be the bookkeeper wasn’t doing their job, and would have made sure the taxes got paid if they had known, that person could still find themselves personally liable, regardless of fault.
The take-away from this is that taxes are a big deal, and the state isn’t going to let you walk away from an unpaid tax liability if/when the wheels come off. This is true even if it wasn’t your responsibility to pay those taxes (or make sure the right person did) but you held a position in the company as a “responsible individual.”
The state seems to be getting increasingly serious about tightening the screws, plugging the holes and making this new industry tightly regulated and strictly enforced. It should be clear that this isn’t an industry that you can dabble in, operate loosely and expect to walk away from unscathed if things don’t work out or if you fail to follow the rules.
Attorney David Kerr serves business clients throughout the state, including an emphasis on the emerging legal, regulatory and compliance issues facing new cannabis businesses. He can be reached at email@example.com.