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Don’t let dormant business accounts come back to bite you

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It happens more often than you may think: A bank notifies a small business owner that the IRS or the state is levying his bank account in connection with a corporate entity he stopped using years ago.

How can that be? The risk lies in improper handling of so-called dormant corporations.

As you know, corporations are meant to be separate from their owners. The owner can’t be held liable for the corporation’s debt. So just walking away from a corporation without closing it down is a common strategy to avoid the burden of minimum annual taxes due. Dormant-corporation issues also occur innocently enough when entrepreneurs launch businesses that end up fizzling or being replaced by similar enterprises.

But abandoning a corporation isn’t enough to dodge back-tax collections. Say you walked away from a corporation you set up and never really used, so there isn’t any personal responsibility. The big mistake: If the small business or its partners or shareholders took any assets out of the account without paying taxes, the IRS or the state can link it to the business owner, who can get stuck with personal liability for unpaid taxes and penalties.

To avoid this situation, follow these four guidelines:

1. Don’t mix business and personal dollars. Many small firms continue to use bank accounts that were established for a corporation for their personal business as well. Always keep the two separate.

2. Don’t leave old accounts open. Small business owners too frequently continue to use an existing checking account, stationery or legal forms that were established in the owner’s personal name or the old business’s name. Technically, that means you’re using assets that the business doesn’t own or have the right to use. Close out old bank and credit card accounts.

3. Examine your account’s signature card. See whether it contains your corporate name (i.e., “Inc.”) and what the taxpayer ID number is. If it was set up as a corporate account, open a new account.

4. Seek a tax-clearance certificate. You can request these from your state’s tax department. Unless you’re operating a sole proprietorship, you may need this document when dissolving, merging or purchasing a business.

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