Item #17 on Lee’s formalities checklist reads “Are you sure that you have properly documented all transactions between you and the company, with resolutions, minutes, etc?” Reimburse responsibly. In other words, have you made sure any reimbursements for personal vs business expenses have been properly made and documented? Also, are any distributions to you from the company properly made and documented as well? Screw up here and you’ll live to see your asset protection disappear in court.
As has been stated many times, commingling between an owner and his or her company is the death nail for asset protection and piercing the corporate veil. Because it is such a powerful weapon as damaging evidence, anyone who wants to take down an owner can use it to make the kill. So, it deserves to be looked at from different directions. Trust me; the plaintiff coming after you will look for commingling in every facet of your company and personal life.
It’s more than just keeping accounts straight. You can use the company card to buy personal groceries, and then reimburse the company. That keeps the books separated, and money isn’t commingled – at least not as far as an accountant is concerned. You could also periodically add up the total cost of the personal items you have purchased using the company card or checking account and then have that total cost be “charged” to you as a distribution. But how does this all look? It looks bad!
The question the judge wants to get to the bottom of is whether or not the company stands on its own or is just the owner’s alter ego. The more personal interactions the owner has with the company, the more it looks like the owner is just using the company as his or her alter ego.
A big company isn’t going to let the stockholders or even their executives keep buying groceries on the company card and then reimbursing the company for the expense. That would drive the accounting department nuts. The big company certainly isn’t going to add up all the personal expenses an executive accrues up during the year and call that his bonus for the year. This is all laughable when you think of it in the context of a big company.
The guy coming after your little company is going to make it sound just as laughable to the judge if that is basically what you have been doing in your little company. The argument is, “Your Honor, this is just the guy’s alter ego. Look at all the crap he has done. He doesn’t deserve the protection of the corporate shield. Let us go after him personally.”
The judge will look at the commingling issues very closely, because commingling is basically the “acid test” for how you treated your little company.
It is certainly wise to take a salary and then make a distribution of the profit to the owner. That is a good tax play, but the distribution is usually made once or twice a year of a round number amount. Make sure that the corporate/LLC minutes reflect an authorization to make the distribution.
That’s far different than adding up little expenses you make for yourself all year and then having the company declare the sum of your expenses as a distribution. Your operating agreement (bylaws) should outline what it takes for a distribution to be declared. Read your operating agreement against the free one I have for you.
You’ve got to have the appropriate accounting, corporate formalities authorization, and the right feel for things in the conduct of your company, especially when it comes to personal/company interactions. Always ask yourself, “How is this going to sound when my enemy describes it to the judge?” Make sure your accounting will always pass muster.
