Whether you know what’s going on or not, you are still responsible. If your partner takes over the books, even if he refuses to let you see the books, you are still liable for unfiled taxes. It could be very bad news for you when you discover what’s going on.

But I Didn’t Know…

You get a letter from the IRS that says your company hasn’t filed taxes in 2 years. You must contact the IRS immediately. Nothing to worry about because you aren’t involved with the accounting, right? Wrong. Even if your partner keeps you from seeing the books, you are still responsible if your business is out of legal compliance. The key words are “your business”. Because it’s your business, the legal authorities are not concerned about how you and your partner divide duties and responsibilities. They care only about compliance.

This can be pretty serious. I saw one situation where a partner understated company income on the tax filing. He understated by $400,000. Yes, you read that right. The other partners were shocked to find this out. But none of them wanted to correct the problem. One of the partners told me that “Bill is in charge of the taxes. If we get caught, it’s on him.” No, no it isn’t. That $400k meant the company underpaid taxes by $190,000. Add penalty and interest and you’re into some serious money. There is also a strong possibility that the IRS would see this as a criminal act and jail time could be at the end of that mess. You can’t blame Bill.

It Gets Worse

The worse situations I’ve seen with a partner not knowing what’s happening involves Worker’s Compensation Insurance. In the past couple of years, I’ve seen 3 big cases where the business was not paying Worker’s Comp. Something happens to a worker and I get a call that sounds like, “We have a hurt worker and I had no idea that we weren’t paying the Worker’s Comp bill. Apparently, it canceled a few months ago but I didn’t know.”  This is so serious that I have to consider whether I should try to help the partners or run the opposite direction.

Failure to keep your Worker’s Compensation Policy in force can result in fines and even jail time. It doesn’t matter that you didn’t know what your partner was doing.

If your partner has been pushing you out of the business, you might have some possibility for leniency if you can demonstrate that you were pushed out, that you tried to find out what you needed to know, and that you took steps to correct the situation. Can you find emails or texts from your partner insisting that you stay out of the books? That could help you. If you find it convenient to ‘not know’, it won’t work in your favor.

If Your Partner Locks You Out of the Books

If your partner locks you out of the books, don’t just roll with it. It’s time to get help. First, you must ask your partner for monthly accounting and proof of payment of key items. You have a right to that. If your partner will not comply, you need either someone who can mediate your partnership or a lawyer to deal with your partner. It’s serious. Don’t wait. My stomach goes in a knot when I ask about how long someone has been locked out the accounting and they say, “6 months.” Look, sometimes it’s necessary for only 1 person to make entries in the accounting system. Because of liability, it’s important that all partners receive a thorough accounting every month.

Chris Reich