Piercing the Corporate Veil
Lately it’s become apparent to me that there is a lackadaisical attitude in many small businesses regarding separating corporate transactions from personal ones. This concerns me.
What I’m talking about is called piercing the corporate veil, and yes, it’s potentially as bad as it sounds.
First, let’s talk about why you set up an LLC or a corporation in the first place. Remember, it was for legal protection as well as tax benefit. If you are an LLC, you choose whether to file taxes as a sole proprietorship or as a corporation. If you choose to file as a sole proprietorship, then you do not have the same legal protection, but you should still pay attention to what I’m about to say. Same if you are simply a sole proprietorship and not an LLC or a corporation because it is still valuable information.
Filing as a corporation helps protect your personal assets if your business is sued or has financial troubles and there are creditors seeking compensation. Though this risk may be minimal, it’s important and we shouldn’t lose sight of it. Remembering to protect ourselves in this suit happy world is valid.
If the corporate veil is pierced, by your lack of knowledge or disregard for keeping it in tact you are at risk. The normal protection may be lost if the court decides that you did not follow the rules of operating a corporation. In other words, YOU are responsible for knowing and following the rules that apply to corporations to keep the corporate veil in place and if you don’t, you are risking your personal assets.
First and foremost, and the issue we see the most is comingling funds. That can mean everything from not setting up a separate business checking account to using your corporate credit cards to pay for personal expenses and any other number of potential cross overs of funds between your personal affairs and the corporate entity.
From the article published by LLC-Made-Easy.com
Commingling of funds means that you are treating your business’s money as your own. Some ways to commingle funds are:
- Bank deposits made payable to your business from a client is deposited into your personal bank account
- Making withdrawals from your business checking account to pay personal expenses without documentation
- Deposing personal money to pay for business expenses
- Using the same bank account for your business and personal needs
- Writing business checks for personal expenses
- Using a personal credit card for business expenses to get points
- Moving money back and forth between your business and personal accounts without documentation
Think of your company as an island, separate and difficult to get to from your personal empire on land. You need to be sure you are not mixing business and pleasure whenever and wherever possible. With good accounting set up, things can certainly be separated and kept clean. However, it’s up to you to be sure that the business accounts (checking, credit cards, loans, etc.) are only used for business. And, every expense run through your business is a legitimate business expense.
Verifying that you have clean accounting and the two are like church and state will protect you in the event of problem.
Please, review your practices and verify that you are following the requirements imposed. They are there to protect you and if you fail to confirm that how you are handling your funds is within the law, you are putting yourself and your personal assets at risk.
Contact us today for an evaluation of your situation, we can help you determine if you are taking unnecessary chances.
Sherry Lutz Herrington is the owner of Sherrington Financial Fitness, a business consulting and accounting firm specializing in strategic business planning and solid financial accounting for businesses. She is also the author of Strong Women Thriving (https://strongwomenthriving.com/), a blog which focuses on empowering women to be financially savvy, particularly after experiencing financial abuse. Sherry is currently writing a new book that both shares her personal story and addresses financial abuse. She can be reached at hello@strongwomenthriving.com.