Thursday, August 7, 2008

The high cost of not following the rules

A client of mine is out of business. They were struggling for the past two years operating in the construction industry and the economic downturn hit them hard. While the economy played a part, the truth is they were poorly managed.

I won't go into all the details but they didn't take advice from me or their other advisers and failed to deal with the details and realities of their situation. They acted as if little were wrong despite the fact they weren't paying their payroll taxes (This is a ominous warning sign). People responsible for payroll decisions can be held personally responsible for the payroll trust fund taxes.

While I was working with her to settle past tax problems, I recommended that she obey the first rule of holes (When you are in a hole, stop digging) and that she should seriously consider closing shop if she couldn't meet her payroll tax obligations.

I subsequently met with the owner and a team of mentors and advisers about a year ago to help them understand some of the accounting and business issues they faced. All the advisers agreed with my advice and that closing would at least stop the bleeding.

Needless to say she pushed on and continued to rack up debt. She closed the business last month and now owes over $100,000 in trust fund taxes. The IRS will lien her home.

The ultimate kicker however is that she also failed to renew her corporate license, let it lapse and is now personally liable for many debts that would otherwise have stayed inside the corporate entity.

I feel bad that she has all these problems but leading a business requires attention to detail and making sure you follow the rules.

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