Does a single member limited liability company (SMLLC) afford protection to taxpayers who owe the IRS personally?

13 December 2014
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Question: Does a Single Member Limited Liability Company (SMLLC) afford protection to taxpayers who owe the IRS personally?

Answer: State law will control whether the IRS or any creditor has the right to LLC assets. In general, the answer is that creditors of an LLC member have no rights to the “assets” of the LLC. They may be able to intercept payments the LLC makes to a member through what is known as a charging order or other means.

The IRS must look to state law to determine whether a person has an ownership interest in any particular asset. Aquilino v. United States, 363 U.S. 509 (Sup. Ct. 1960). If state law does not vest an ownership interest in an asset in favor of the person who owes the tax, the IRS cannot seize that asset. But, not everyone working at the IRS understands the law in detail and a zealous IRS Revenue Officer may go after your accounts.

Can the IRS attempt to levy the LLC bank account? Yes, they can. Would they be correct in doing so? Assuming the LLC was run properly and not as a personal piggy bank, then the IRS would not be justified in doing so. However, just because the IRS may not be able to successfully levy the Company’s bank account does not mean you are out of the woods.

If the LLC is paying you a salary, the IRS could garnish you wages. The IRS could also attempt to collect as against any distributions made by the LLC to you on account of your ownership interest in the LLC.