Most people form an LLC or LLP to shield themselves personally from debts of the entity. This generally works quite well, however, LLC members and limited partners are jointly and severally liable  for the sales tax of the entity in New York State. This is unjust on many levels. Had the entity been formed as a Subchapter “S” corporation only the responsible officer (One who make business decisions for the entity) would be held liable and not a passive investor in the entity.

New York State has offered some limited relief, the exposure of an LLC member can be limited to his interest in capital and profits, thus a 10% member would only be responsible for 10% of the sales tax deficiency. Most passive investors would never enter into this type of an entity having up front knowledge that they could be held liable for tax deficiencies of management which they do not participate in.

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