Why should you be worried about commingling as a California business owner?  Commingling is the use of personal money, funds or assets for business purposes, as well as the opposite – using business funds, credit cards or assets for personal reasons.  Why should you be cautious about commingling in your San Diego business?

Commingling is an easy thing to do for many small business owners in California, as they are simply in the midst of trying to make their business run.  They may be waiting for a deposit to clear, or simply lack funds in the business checking account, and use a personal credit card to pay for a business account or purchase.

The reason to be worried about commingling funds or assets is it makes LLC or corporation vulnerable should any legal dispute arise.  In a lawsuit, the business entity – the LLC or corporation – exists to protect the owners of the company from personal liability for corporate debts or obligations.  In many cases, the business owner, member, investor or shareholder is worth much more than the entity itself.

Therefore, the creditors best strategy is to attempt to get past the protections of the corporate entity so that they may pursue the owners personally for debts and liabilities of the company.  This primary tactic is known as “piercing the corporate veil.” In effect, the creditor’s legal argument is designed to establish that there is no difference between the individual(s) and the business itself.  There isn’t a distinction between the “company” and the “person” (from a legal point of view).  Commingling of funds or assets is one of the easiest ways for this to be accomplished, and now you find yourself personally liable for a debt or liability that should have been borne by the protections of the LLC or corporation.

Pro-Tip: “Commingling is a huge issue, especially if you’re going to be doing some big business. You’re going to have big potential corporate liabilities that could become big personal liabilities for the company’s owners.  Or, you could structure the company, operations, controls and agreements to ensure the owners of the business are never exposed to a a big personal liability.

Those things we can handle because we have a transaction team here too. So when we work with clients to form or acquire a business, we’re already putting those kinds of clauses in. So you might be in a business dispute with a partner because you didn’t have those types of clauses in your agreement or corporate documents to begin with. And perhaps the resolution of your lawsuit will be having the proper bylaws, operating agreement (LLC), or shareholder agreement going forward.

We resolve the vast majority of commingling cases through a negotiated settlement. When there’s a settlement agreement at the end of a dispute between two parties that are in business together, it is much different than two separate parties who had one contract. If you’re going to stay in business with each other, then you’re going to want additional clauses and assurances that commingling won’t happen again, you’re going to want to give some kind of compensation or power, change the structure, change the controls in place, do something to improve the situation.” – Dan Watkins, Founding Partner

This is why you should be worried about commingling business and personal funds and assets.  Protect your investment.  Protect your own money, home, assets and wealth.

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.