Liability Dangers for Corporate Officers and Directors– Posted by Jason E. Wax
If you’re an officer or director of a Washington business, you need to be aware of specific liability dangers that could create personal liability for you and place your personal assets at risk. As a general rule, a corporation’s officers and directors are not responsible for corporate obligations. But there are specific liability dangers that may impact officers and directors, especially when the corporation is struggling financially. Four of the most common liability dangers for officers and directors are unpaid state sales tax, unpaid federal withholding taxes, unpaid employee wages, and distributions to corporate shareholders while the corporation is insolvent.
In Washington, certain sales taxes are considered “trust fund” taxes. This means that the business is obligated to collect the taxes from its customers, and to hold the taxes in trust for the state until such time as they are paid over by the business. The state retail sales tax (RCW 82.08) is a good example of this. Not only is failure to pay the sales tax over to the state a gross misdemeanor, but the statute also provides that the seller is personally liable to the state for the amount of the tax. RCW 82.08.050(2) and (3). It is therefore critical that officers and directors prioritize timely and accurate payment of all sales tax over to the state.
Unpaid federal withholding taxes are perhaps the single most common liability creator for corporate officers and directors, and the consequences are often severe. Pursuant to 26 U.S.C. § 6672(a), there is a 100% penalty based on the amount of the unpaid tax obligation, and the corporate liability becomes a personal liability for all “responsible persons”—a category that includes officers and directors. Unpaid federal trust fund taxes are also non-dischargeable under the Bankruptcy Code. 11 U.S.C. § 523(a)(1). This means that even if the corporation ceases operations, liquidates it assets, and the officers and directors all file for bankruptcy, the “responsible person” liability will remain for the officers and directors until the obligation is paid off or otherwise settled with the Internal Revenue Service.
Officers and directors may also be liable for a corporation’s unpaid employee wages in Washington. The statute creating this liability provides for double damages, attorney fees, and costs, creating the potential for substantial personal liability. RCW 49.52.050 and 49.52.070. If a corporation is approaching insolvency or otherwise struggling financially, officers and directors should ensure that the corporation continues to meet its wage obligations if they want to avoid being named in a subsequent wage claim.
One final liability danger for officers and directors comes in the form of distributions to shareholders while the corporation is insolvent. As a general rule, a Washington corporation may not make a distribution to shareholders unless it retains sufficient assets to pay all of its creditors. RCW 23B.06.400(2)(a) and (b). Distributions made in contravention of this law may result in personal liability for officer and directors. If you’re an officer or director of a Washington corporation under financial strain, it is critical that you understand the extent and nature of the corporation’s assets and liabilities before making any distributions to shareholders that could render the corporation insolvent.
If you’re the officer, director, or owner of a business in Washington and you’re concerned about your potential personal liability for business obligations, the business and commercial litigation attorneys at Lasher Holzapfel Sperry & Ebberson have the experience and knowledge to help you find the best path forward.