Question

Donald Wilson has a great deal of experience with respiratory therapy. James Smith has the business connection and knowledge. They have decided to start a partnership that sells respiratory equipment, employing several sales representatives. They have decided to share equally in the net income and net losses. After two years, the business is thriving having sold more than 1,000 units this year. One day, Donald receives a call from the Internal Revenue Service (IRS). Unknown to Donald, James has not paid the payroll taxes for last year and is behind on the payroll taxes in the current quarter. Donald learns that James has a gambling problem and there is insufficient money to pay the IRS. James has no personal assets that can be confiscated. What are Donald’s options for the resolution of the IRS problem? What is Donald’s liability? What actions should Donald have taken prior to the partnership agreement?

Answer 1

The business in itself is not hampered due to not paying taxes. Payroll taxes are taxes that individual partners are to pay for their share of income in the profit of the company. Donald Wilson is a partner and not an employer. He is not liable to account for unpaid taxes of his partner. A partner in a partnership is separate from the partnership itself. James has defaulted in his tax payment, and the criminal proceedings should start against him as and when required.

Donald should have decided on the ownership percentage before going into partnership. He should have checked the assets of James and mutually decide on the proportion of profit to be divided among them.