I recently wrote in a post titled Tax Advice, Legal Advice & Piercing the Corporate Veil that it would be legal malpractice for an attorney to advise his corporate and business clients to commingle their personal and business funds.
I wrote the post in response to June Walker who had written a blog post titled You Do Not Need a Business Checking Account in which she proceeded to give that very advice to her clients and readers.
I said that she was not only giving bad advice to people, but that she was also engaging in the unlicensed practice of law.
(At least a lawyer giving this misguided advice would have malpractice coverage from which the badly advised client could be made whole.)
Ms. Walker responded with a post titled There’s No Shortage of Bad Advice Out There. In it, she reiterated her advice to commingle, corrected my grammar and called me “Atilla the lawyer.”
(Okay, at least the Attila comment is funny.)
Because the larger point of my post was apparently lost, I found several links which corroborate the points I made.
One of the better ones is an article from LLC Made Easy that talks about the perils of commingling:
Commingling of funds means that you are treating your business’s money as your own.
Some ways to commingle funds are:
Depositing checks made payable to your business into your personal bank account Making withdrawals from your business checking account to pay obviously personal expenses without documentation Using the same bank account for your business and personal needs. Writing business checks for obviously personal expenses Moving money back and forth between your business and personal accounts without documentation Keeping your corporate veil intact
“Piercing the corporate veil”.
Having your “veil pierced” sounds like a bad thing.
It is.
All that work you did to form an LLC or corporation–filling out Articles of Organization, paying filing fees to your state, drafting an Operating Agreement–will be for nothing as far as protecting your assets from creditors if your veil is pierced.
Now, there are several factors that courts look at when deciding whether to pierce your company’s veil and hold you personally liable on company debts and lawsuits. One important factor is the presence of commingled funds.
If you treat your business’s money the same as your own, then you risk the exposure of your personal assets.
Again, whether they are incorporated or not it is incredibly bad advice to tell small business owners to commingle their personal and business funds.
An advisor with even a basic understanding of the law of limited liability, piercing the corporate veil and the IRS audit process would not have told her readers to use only one bank account for their personal and business transactions.
Legal Advice: All small business owners should consider conducting business in either the corporate or LLC form. In addition to the benefits of limited liability, doing business in one of these forms will substantially decrease your chances of being audited by the IRS.
12 responses so far ↓
1 Judy // Aug 19, 2009 at 12:00 pm
Peter,
Actually, I’m still employed at this place. I would like to be referred to a tax atty. If you happen to know a good source for referral I’d appreciate that information.
Should I stay or should I quit.
My employer wants to go with me to the 4180 meeting when she gets back from vacation. I call it abandonment since the businesses are in such bad shape but she calls it a vacation.
The thing is I don’t really want to cause her a lot of trouble at this meeting. It seems to me it would be in her best interest if I didn’t have to go.
2 Peter // Aug 19, 2009 at 4:59 pm
Judy, please call my office amd we’ll discuss this over the telephone.
Is the business paying it’s payroll taxes now?
3 Judy // Aug 20, 2009 at 12:09 pm
What’s your office number?
4 Use Separate Business Account, IRS Says // Sep 2, 2009 at 5:01 pm
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5 Home Office? Is it a Good Idea? // Sep 4, 2009 at 2:23 pm
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6 michele // Apr 12, 2010 at 4:07 pm
Im on a board of a non profit and the president pays expenses for the non profit with her personal business card, is this co mingling?
7 Peter // Apr 12, 2010 at 5:33 pm
Michele,
No, it’s not co-mingling. And it’s not unusual for employees to pay business expenses and then be reimbursed by their employer.
Make sure your non-profit has a written expense reimbursement policy and that it’s enforced.
By the way, a much more problematic scenario would be where the non-profit paid the President’s personal expenses.
8 Erick // Nov 22, 2010 at 2:24 am
I’ve been employed at my current employer for 8 years now and have noticed that the officers of the company have been using Corp. (Company) funds to pay for car registrations and car payments . also using company credit cards for personal use… Is this considered co-mingling???
9 Peter // Nov 22, 2010 at 9:18 am
Erick,
Perhaps, but remember, co-mingling is not illegal, it’s just unwise.
10 Hmm // Jun 10, 2011 at 10:55 am
Customers pay for product with cash. Then the boss takes the cash and replaces it with his personal check. What’s the liability here?
11 Peter // Jun 10, 2011 at 11:19 am
Hmmm, that’s not commingling.
12 Tom // Jan 28, 2012 at 11:47 am
Peter,
I have a client that was a 50% owner of an llc and incharge of paying bills. He used the company debit card to pay some of his personal bills and accounted for them as distributions not expenses. Is that illegal? Can you provide me with case law to support position?
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