Could a business partner commingling funds pierce the corporate veil of your corporation? The act of commingling personal and business funds or assets can absolutely put your company and the owners of the company at great risk.
What is Commingling?
What is commingling? Commingling is simply using personal funds or assets for business purposes, or using company funds or assets for personal reasons. A common example is making a car payment for a vehicle titled in the partner’s name (personally) with a corporate credit card.
The argument is that the vehicle is primarily used for business purposes, but the law may not agree with you and this simple action of a business partner commingling funds could allow creditors to pierce the corporate veil and hold you and your partner personally liable for the business debts of your corporate entity.
The first thing a creditor would do in a lawsuit is seek access to business banking records looking for precisely that type of transaction. Moving money loosely back and forth between a business and personal accounts all but eliminates the protections of the corporate veil.
What Should You Do if You’re Concerned About a Business Partner Who Commingles Funds
What should you do if you suspect that your partner is using commingling tactics to take more money out of the company than they should? It is not prudent to confront a partner, co-owner, shareholder or another member of your LLC and accuse them of theft without substantial evidence.
The experienced corporate attorneys at the Watkins Firm can help you to discern what is actually happening and put a stop to commingling and any potential theft-related activities. We can help you to develop controls, and investigate past actions and behaviors to identify theft. One example is to make sure the company requires actual original receipts and not copies for all business-related expenses. If you have a cash register or cash on premises you might consider implementing a camera system to monitor activity around the cash. Forensic analysis of business checking accounts and credit card statements should bring wrongful activity to light. When we have genuine evidence, our attorneys can confront your partner.
Pro-Tip: “For example, we’ve, we’ve had so many shareholder fights where a group of friends, or a group of friends who know friends, maybe 30 people invest in a company and it’ll be doing well, but not great. And the investors, the shareholders won’t be receiving disclosures, or they will be receiving them, but they sort of don’t add up. And then they do an investigation and they come to our law firm and they say, ‘well, let’s, let’s get in there to see the books and records,’ and you get some pushback from the company. And that’s when all the hairs in your neck stand up and we file a motion.
And we discover through our due diligence that the company’s doing very good and that they also formed an offshore corporation of the same name. And they’ve taken all the assets and they’re all driving Rolls-Royces. So this has happened more times than I can say, because it just does happen. Nobody fights over anything unless there’s money involved. If it’s just doing okay, they would tell the truth and say, it’s all great. But if that big money offer comes in the door and they have a way of keeping it for themselves, it’s very tempting for human nature to turn that down.
Owners and majority interests usually won’t do these things unless it’s really worth something. Think about timing . If let’s say you don’t have a shareholder agreement, or you have a weak shareholder agreement and, management has broad discretion to do a lot of things, and they’re getting ready to do some questionable things, to make a big profit. And you come along and say, ‘wait a minute, I think something’s wrong here.’ And you pose an objection. Well, before you file a lawsuit, this opportunity that management has is still there. So if you are the squeaky wheel right away, before they go forward with whatever they’re doing, then you may profit from that. But if you’re not, then it’ll just happen. And instead of sharing in the profits, you’ll be fighting to claim you had rights to get some money back.
We’re describing what I would consider to be a conflict of interest between an owner’s obligation to their fellow owners, members, or shareholders and their own personal interests. Everybody hears the terms commingling or business theft and they think it’s something like special or amazing or complicated, but it’s really not. This is the world’s oldest con game.” – Dan Watkins, Founding Partner
A Business Partner Who Commingles Funds Creates Several Civil and Potentially Criminal Issues
A business partner who commingles funds creates several civil and potentially criminal issues. Commingling is a breach of fiduciary duty to the company, as well a potential source of embezzlement or theft allegations. The falsification of business records is also consistent with business fraud and embezzlement charges.
If you are concerned about a business partner commingling funds or are worried that a co-owner might be involved in theft from the company resulting in the loss of the corporate veil we invite you to review our podcast Sound Business Insights, as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
The Watkins Firm will work with you to develop a detailed strategy that will take the concerns off of your shoulders and get your mind re-focused on solving the problem and running your company. We can be a valuable partner to clean up internal operations and activities that may be a threat to you or the life of your company.
Meet Daniel Watkins:
Daniel W. Watkins is a true people person who sincerely listens. He cares deeply about what others are going through. Dan enjoys digging into the facts and finding creative solutions to problems. He contributes his insights candidly and constructively.
Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.
Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a trusted litigation strategist and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.
He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.
THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR
Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.
In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.
