What is the Corporate Veil?
Piercing the corporate veil refers to a court ignoring the limited liability of a particular business entity when there is outright fraud or abuse taking place within a business. Each state has its own case law concerning when the corporate veil can be pierced, but one circumstance that is a consistent requirement for many states, is when the business owner intermingles or commingles personal and corporate assets. A business necessarily is defined as its own business entity with its own separate funds and fiduciary interests. When a company pays for the owner’s personal expenses directly, this may not be considered “arms-length” when in litigation. Take the necessary step to loan funds to or from business entities when needed in an official capacity.
Tax Consequences to Avoid Commingling funds should be avoided with proper workflows and procedures, like keeping separate bank accounts and a separate set of books for each business and personal entity. Not only can this meet the legal requirements, but it is also the best method to keep track of all tax-deductible expenses. Commingling funds can lead to missed expenses which may lead to higher tax liability at the end of the year.
Legal Ramifications of Commingling Funds
The court’s reasoning behind this treatment to pierce the corporate veil when a business owner commingles funds is that the business owner isn’t actually operating the company as its own separate entity, but as an extension of their own personal assets. Many times creditors seek to pierce the corporate veil in order to recover debts personally from business owners who have failed to uphold their fiduciary responsibility to their company. That is why it’s so important to take the time to keep the expenses and incomes within a company within their own accounts and set of books. If you have partners, and the company is in litigation creditors may try to pierce the corporate veil. If they succeed, creditors can then go after all personal assets, bank accounts, investments, and other assets to satisfy the corporate debt. Be sure to look at the specifics of piercing the corporate veil in your state. In the meantime, set up the necessary structures and workflow to avoid commingling company and personal assets.
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