You may have heard the term is “piercing the corporate veil.” That typically refers to holding an officer, director or shareholder of a corporation personally liable for something done by the corporation.
People in these positions are typically immune from personal liability because of the legal structure of the business unless they have commingled their personal and business assets. Doing that removes their immunity. It’s also a violation of their fiduciary duty to their partners and the corporation.
Commingling of personal and business assets doesn’t always involve an intentionally fraudulent act, such as paying for your family car from a business account. Sometimes people do it to save a step. Instead of depositing a client’s check into their business account and then paying their salary out of that account, they may simply deposit the check into a personal account. That’s commingling personal and business funds.
Why this is important even for sole proprietorships
If your business is a sole proprietorship, it’s not a separate legal entity. That means you could be held personally liable if your business is sued or for its other debts. So why bother to keep your personal and business finances meticulously separated?
For one thing, it will make your financial statements much clearer and more accurate. If you apply for a loan to buy new equipment, buy a new commercial property or renovate your current location, you’ll need to provide financial records that show only business financial information.
By not commingling personal and business funds, you’ll also reduce the chances of making a tax error that could cost you significantly. You’ll probably have to spend less time explaining things to your tax preparer or accountant as well. Even if you put your personal life savings into your sole proprietorship when you started it, it’s not too late to put up your own “corporate veil” now.
Whatever type and structure of business you have, if you’re dealing with legal issues because of the commingling of funds, it’s crucial to seek legal guidance. Your business and your personal assets could be at risk.