If you have questions about the commingling of funds and assets, you are not alone. Here, we will answer all your questions and clear up the misperceptions that exist about commingle funds.
Brad Nakase, Attorney
Commingling Definition
The importance of maintaining a sturdy wall between one’s company and one’s personal assets is paramount to business success. So, let’s begin with the definition of commingling. In business, commingling is blending an individual’s business funds with their personal funds. It also refers to the act of using one’s business assets for reasons deemed confidential.
Commingling means that the mixing of money which can create a real challenge for any business owner, but they can be even more taxing on their operations and create a real headache for small businesses. When the owner of an LLC, for example, discovers that he or she cannot distinguish between the company’s personal accounts and its business funds, complications are sure to arise.
Why and How Does Commingling Occur?
These days, our lives and our businesses move and progress rapidly, along with the unrelenting flow of news and information that finds its way to us each day. In the midst of this turmoil, it can be challenging to maintain the correct separation between personal accounts and business accounts. Indeed, during the first phases of a startup, sometimes it is challenging to keep a divide between new company profits and old personal accounts. Additionally, during a period in which revenue streams dwindle, and cash flow lessens, it can be tough to keep this divide strong due to extended receivables.
Is Commingling Illegal?
All of this is understandable, if not relatable. Most entrepreneurs and small business owners are working diligently to make their ventures succeed, and many of them do not have the budget for an accountant. During a particularly challenging week full of work challenges or life hurdles, some individuals simply move money from account to account in order the keep the business—and their lives and families—afloat. Many of us are familiar with the scenario in which we receive a bill to our company that we need to pay quickly, so we pay it off with a personal debit card, or the reverse of this occurs. Usually, business owners pass this behavior off as “quick thinking” and figure that they will reconcile their choices before tax season is upon them.
Unfortunately, this type of commingling is dangerous. While it undoubtedly can negatively impact your business, it can also dramatically affect your individual rights and liberty.
A Breach of Trust
Many business owners have a sense of what commingling is, but they are not aware of the gravity of the act. In fact, commingling is categorized as a breach of trust in the business world, and it can even pierce the corporate veil of the company you have worked so hard to build.
Most companies are made up of shareholders, officers, and members. These individuals are granted access to the business’s financial accounts and various assets. Based on this, these members have what is known as “fiduciary duty” to the company, which must be honored. Fiduciary duty, put simply, is a responsibility or obligation of trust.
In a practical sense, the commingling of personal funds and assets that strictly belong to the business can damage the company’s records. It is challenging for an accountant or even the business owner, not to mention the shareholders, members, and officers, to figure out what funds are personal and what assets belong to the company when there is no divide between the company money and private money, confusion and distrust reigns.
While commingling can make running the business complex, it can also have much more dangerous and damning results. A caught commingling person can be found guilty of fraud or embezzlement and opened up to civil liabilities. Therefore, whenever anyone at the business, be they a shareholder, owner, or member, suspects someone of commingling, they must report this offense to the authorities.
Piercing the Corporate Veil Through Commingling
If a member or owner of your business is commingling, they can quickly and easily put the entire company at risk. Suppose there is substantial evidence of commingling business and personal assets. In that case, a business creditor or competitor will sometimes pursue the business members’ emotional support as a way of making up the debt. This could include going after home equity or other personal assets. Even investments can be sought out and taken.
Sometimes, owners of LLCs or members of corporations think they are “safe” or “safer” than other business formations and structures. This is because corporations such as LLCs provide limited liability to members and shareholders, therefore establishing the business as a separate entity and protecting the owners from being obliged to use personal funds to satisfy company debts. One of the main attractions of forming an LLC, in fact, is this separation between the company and personal liability.
A Lack of Separation Between Personal and Corporate Finances
However, commingling makes it difficult for judges to understand and visualize the divide between what is personal and what pertains to the corporation. When commingling occurs, it is not tricky for adversaries and competitors to make the argument that the separation or divide is a myth. They will suggest that the business is not a separate corporation from what is personal and is instead a counterpart. This apparent lack of a sturdy wall between personal and business finances leads creditors, competitors, adversaries, and the law to pierce your corporate veil, rendering all of its protections useless. In this case, the business and its members are especially vulnerable to being pursued debts, being sued, losing personal property and finances, and even being imprisoned.
Contact Nakase Wade for Commingling Questions and Counsel
Our skilled, professional business lawyers and corporate attorneys at Nakase Wade are poised to help clients structure and restructure their businesses to prevent problems that arise from commingling. We have provided helpful, practical advice to numerous small and large businesses across California, and our legal team understands the dangers of commingling and how to prevent it. In order to protect your business, please contact us for a free consultation today.