Limited Liability Companies

Limited Liability Companies

October 01, 2004

Limited liability companies are being held accountable in many states for taxes that their out-of-state owners fail to pay.

Most infrastructure projects are undertaken by a special-purpose subsidiary that owns just the project.  In the United States, limited liability companies are favored for this purpose.  LLCs give their owners limited liability.  Thus, claims against the project company cannot be collected from the owners any more than a claim against IBM or General Motors — both of which are corporations — can be collected from shareholders of those companies.  At the same time, limited liability companies offer greater flexibility than corporations.  The owners can choose for US tax purposes whether to have the LLC taxed like a corporation or treated as “transparent,” meaning the company is not subject to income taxes and any taxes are collected from the owners directly.

Many states are moving to hold LLCs accountable for taxes that their out-of-state owners fail to pay.  A survey in Tax Notes magazine in September done by the law firm Bradley Arant Rose & White LLP reports that 27 states now require transparent LLCs to withhold income taxes for their out-of-state owners.  In some of the states, withholding can be avoided if the owner promises to pay the taxes himself.  The states are Alabama, California, Colorado, Connecticut, Georgia, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan (individual owners only), Minnesota, Missouri, Montana, Nebraska, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Vermont and West Virginia.

In three states, the LLC is contingently liable for taxes that out-of-state owners fail to pay.  In such states, the LLC should get a commitment from each owner that he will pay his taxes.  Otherwise, the burden may fall on the LLC and, indirectly, on the other owners.  The states are Alabama, Idaho and Kentucky.

In Mississippi, the other owners are “jointly and severally liable” for any unpaid taxes — meaning that the state can collect the full taxes owed on the company’s income from any one owner — unless the LLC withholds at least 5% of its income in taxes. 

Keith Martin