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Keeping Your Business and Personal Finances Separate
When you form an LLC or corporation, it means the business is regarded as its own legal entity and the shareholders, officers, and directors will not be held personally liable for the actions of the corporation. In order to keep the “Corporate Veil” or “Corporate Shield” in place, the business is accountable for any debts and legal responsibilities it incurs and must maintain its own finances.
When kept in good standing, the corporate veil helps protect owners from having to surrender personal assets to pay the debts or settle legal issues of the company. If a court determines that the corporation or LLC has compromised the separation, it is referred to as “piercing” or “lifting” the corporate veil and the liability protection no longer applies. Mixing business and personal finances is one way business owners put the corporate veil in jeopardy. Once the corporate veil is pierced, the individuals behind the business entity are then personally accountable for any debts or legal wrongdoing of the business.
Other ways to pierce the corporate veil are failing to maintain LLC or corporate records required by the state, using business assets for personal purposes, paying for personal purchases with a company credit card, and personally guaranteeing a business loan or using personal property as collateral for a business loan.
A point of clarification is necessary regarding paying for personal purchases with a company credit/debit card. The worst-case scenario would be an instance where personal expenses are paid by a company credit/debit card and passed off as business expenses. This is clearly illegal and not only pierces the corporate veil but creates issues with the IRS that could result in substantial penalties and even imprisonment. However, in the scenario where personal expenses are paid by a corporate credit/debit card and properly recorded as a personal expense (owner draw), the corporate veil is still clearly pierced. Hence, the only proper approach is to never pay personal expenses with corporate funds even if subsequently reimbursed.
Please contact us if you need any further clarification.