Are You Betting on the Wrong Horse?
One of the most common, and dangerous, mistakes that plague the managements (entity actors) of small business corporations and limited liability companies is the failure to keep personal funds, assets, and activities and business funds, assets, and activities totally separate and walled off from one another.
After all of the hard work of organizing a corporation or a limited liability company, and the even harder work of developing a service or a product so that is marketable, it is foolish in the extreme for business entrepreneurs to invite ruinous disaster by co-mingling.
There are various attitudes and avenues that lead small business corporation and limited liability company actors to co-mingle. They should all be carefully identified and kept under strict control at all times.
Careful thought will readily expose many reasons why commingling is a horribly bad business idea and practice. Among those reasons are the following:
– it exposes a management mindset that is the polar opposite of the professionalism required for business success
– it is an extremely sloppy way of doing business
– it makes accurate accounting well impossible
– it prevents the compilation of critically important and valid business financial statements
– it will turn annual business and personal tax realities into a briar patch
– It will result in a negative business reputation and cause the entity to be shunned in the market place
– it will confuse, even hide, the facts needed to determine what parts of an entity’s business activities are doing well or poorly
– it may well cause the business entity to fly blindly into lethally dangerous territories
– it will bring creditors and others down upon a business entity and its owners like ravenous wolves
The following is a quick review of some of the ways that commingling can occur (this list is not exhaustive):
– borrowing from, or lending to the business entity without documentation
– failing to have business assets titled specifically to the business entity
– paying personal obligations from the business entity’s accounts
– using business entity credit cards for personal expenditures
– failing to maintain separate business entity accounting records
– depositing checks payable to a business entity in personal bank accounts
– moving funds back and forth between and among business entity accounts and personal accounts without documentation
– failure to fully document transactions involving assets and/or expenses that have mixed (part business, part personal) uses
– failure to have business entity insurance programs issued in the name of the business entity
The danger of stumbling into commingling activities is insidious. Contrary to what most people think, such activities are rarely individually gigantic in scope, and they do not suddenly fall upon hapless victims as cataclysmic events. The uncomfortable reality is that such activities come in small, almost unnoticeable, steps that accumulate finally in disastrous accusations by people outside of the business that material commingling has occurred to the detriment of the accusers.
Small business owners should never lose sight of the fact that their financial elbow room is limited. They must be prepared for those times when their businesses will experience financial difficulties. Almost always, the owners will simultaneously be on a short financial tether. In such times, there will often be insufficient cash in the business to pay its bills, and insufficient cash in owners’ accounts to pay their bills.
In such circumstances, the temptation to get loosy-goosy and sloppy and slip and slide back and forth between business and personal worlds in order to survive may be powerful, even irresistible, but it should never be allowed to happen, because tight times, unfortunately, are precisely the times when a business entity is most likely to be subjected to high intensity scrutiny by creditors and others who are not being paid. This scrutiny will probably take the form of a lawsuit in which such plaintiffs will seek to pierce a business entity’s limited liability veil. If business entity actors have bet on the wrong horse (commingling activities), business owners will be in the difficult position of trying to defend the indefensible.
Perhaps the best asset protection hedge against such unhappy results is to make sure that all business entity actors fully understand that when funds and assets are transferred into or out of a business entity, there must be a legitimate business reason for doing so, and that such reasons must be in the best interests of the business entity, and that there must be a timely, accurate, and complete paper trail memorializing each such legitimate business reason. For example, if it is legitimate to borrow from, or lend to a business entity, record an appropriate resolution, sign a promissory note, charge fair market rate interest, and make regular payments.
When this and other standards regarding separation of entities and documentation are scrupulously followed, commingling accusations should not occur.
If commingling problems do happen to occur, correct them immediately. Good faith efforts to do things properly may well go a long way in the event of a commingling dispute.
Do not make a hash of your small business corporation or limited liability company by commingling funds, assets, and activities. Do not make your personal life a torture chamber by commingling funds, assets and activities.
© 2011 America’s Corporate Headquarters. All rights reserved.