Commingling funds between business and personal accounts is a dangerous practice which can threaten members in an LLC or investors in a corporation. The practice of commingling brings trouble with creditors and even the IRS and California tax agencies.

What is commingling?  Commingling is simply using personal funds for business purposes, and/or using business money for personal needs.  For example, if you have established a corporation and use a company credit card to pay your personal car payment that is considered commingling.  Yes, even if you only use the vehicle for business – if you purchased the vehicle personally as an individual (or married couple) you cannot pay associated costs such as the monthly payment for the vehicle or insurance out of your business account.

Other examples of commingling funds between business and personal accounts include dry cleaning, coffee or even lunch.  You may feel it’s “during the business day” and the company should buy your lunch, but everyone must eat lunch and unless you have a business reason for eating that specific lunch (you are in the pursuit of business with the restaurant or are having lunch with a client or prospective new account) it is considered commingling.

Receipts are the best way to keep track of expenses that could be argued to be personal by the IRS or a California tax agency during an audit or by a creditor during litigation.  For example, you are at a popular coffee establishment and purchase a cup of coffee for you and your client.  The total bill may be less than $10 and the IRS or creditor will have no way to establish you were with your client at the time months or years from now.  Simply keep the receipt and write details of the situation on the back of it:

“Lunch with client: William Tell”

“Coffee for Meeting with Prospective Client Acme Inc.”

Pro-Tip: “Commingling is one of those activities that really damages a business. The protections of the corporate veil exist to separate the personal money and assets of a business’ owners from the liabilities of the business itself.  The act of commingling allows a creditor to come in and say ‘there is no difference between Mr. Johnson and Mr. Johnson’s company as money is moved freely between the business accounts and those of Mr. Johnson.  Therefore, we ask the court to pierce the corporate veil of the company as the company is not in actuality a separate entity from Mr. Johnson.’ 

This will allow a creditor to pursue the personal money and assets of the business owner to satisfy the liabilities of the company.  

I mean, especially if you’re going to be doing some big business, you’re going to have big liability or you could personally not have big liability. The corporate veil allows the business to take risks without putting the assets and funds of its owners at risk.  That is the whole purpose of having a business entity.

And also you can have an entity that can be sold. You can have an entity that can be sold in whole or bring in investors. If you do everything right, you get to do all these things. If you get a big opportunity and you didn’t set your company up correctly, then you can’t have your friend with an extra million dollars who wants to invest in your business join the company. You’ve got to rewrite everything and you’ve got to restructure everything and you’ve got to hope you didn’t make any mistakes. And all of a sudden that opportunity doesn’t look so like a good deal. And that person who’s got the investment money will say, ‘well, this person’s not professional. This person’s not really serious about doing business.’ And you’ll miss it all because you didn’t pay attention in the beginning when you formed a company.” – Dan Watkins, Founding Partner

Commingling funds between business and personal accounts pierces the corporate veil, allowing creditors to come after you personally for business or corporate debts and liabilities.  It is the first strategy an adversary will take when attempting to collect upon a debt or liability of your business.  The corporation exists as a separate “entity” from you personally, and it is this entity that protects your personal assets from the debts of the business.  When you commingle funds between personal and business accounts you blur the line between the legal entities of “you” (the person) and “your corporation” (the business).

If you have questions about commingling funds or piercing the corporate veil we invite you to review our podcast Episode 34 – Business formation as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.