The Short Answer
If you have signing authority over a business bank account, the IRS can hold you personally responsible for certain business taxes — regardless of your ownership structure. This is especially true for payroll taxes (like Social Security withholdings) that you were required to collect and remit on behalf of employees. Dissolving the business does not erase that liability. Even filing bankruptcy doesn't eliminate all tax debt, but Chapter 13 can help you manage what you owe through a structured repayment plan.
The Internal Revenue Service (IRS) uses a basic logic that if you have any signing authority over the business bank account, then you can be held personally responsible for certain taxes owed by that business. So, yes, if you own a business or part of a business, be prepared to pay certain accrued taxes. This is especially true if you have a sole proprietorship. Additionally, no matter what type of business you own or owned, you also need to be careful when it comes to taxes that you should have paid as an employer – for example, the necessary taxes you pay to the government for your employees (social security, etc.). These can later be assessed as “civil penalties” which you are personally responsible for, even if the business later dissolves.
The general rule when it comes to taxes is that the government – state or federal – almost always gets paid.
What if you have dissolved the company? Unfortunately, dissolving a business will not eliminate any tax debt or liability. Even filing bankruptcy will not take care of all taxes. Generally speaking, the only time taxes may be wiped out in a bankruptcy is if they were filed three years prior to the bankruptcy filing date. The civil penalties mentioned above are also taxes that you can be personally responsible for even if the business has been dissolved.
If you owe a large amount to the government for taxes and are having a hard time coming to terms for a payment plan with the IRS, you may want to look into filing a Chapter 13 bankruptcy, which is a structured repayment plan. This will keep the penalties from accruing and enlarging your original balance owed.
If your business is still operational, you may look into reorganizing your business debt in a Chapter 11 bankruptcy.
The bottom line is that even though you can still be held personally responsible for certain business taxes, you are not limited to repaying your taxes outside of bankruptcy. Certain types of bankruptcy may actually be a better alternative for you when it comes to setting up a repayment plan.
Key Takeaways
- The IRS can assess unpaid payroll and employment taxes as personal "civil penalties," making you individually liable even after a business closes.
- Dissolving your business does not wipe out tax debt owed to state or federal governments — the liability follows you personally.
- Bankruptcy does not automatically eliminate tax debt; taxes are generally only dischargeable if they were filed more than three years before your bankruptcy filing date.
- Chapter 13 bankruptcy can stop penalties from accruing on tax debt and set up a court-supervised repayment plan that may be more manageable than IRS installment agreements.
- If your business is still operating, Chapter 11 reorganization may allow you to restructure business debt while keeping the company running.
- Sole proprietors face the highest personal exposure because there is no legal separation between the owner and the business.
Attorney Insight
The mistake I see most often is a business owner assuming that forming an LLC or corporation fully shields them from tax liability — it doesn't, especially when it comes to payroll taxes. The IRS's Trust Fund Recovery Penalty is one of the most aggressive collection tools they have, and it attaches personally to anyone with financial control over the business, not just the named owner. I've had clients come in after the business has been closed for years, stunned to find the IRS is still pursuing them individually for employee withholdings that were never remitted. Chapter 13 can be a real lifeline in those situations — it stops the penalty clock and gives you a structured path to resolution that the IRS rarely offers on its own.
