There is a huge misconception that business owners are raking in money and screwing their employees and customers by not “sharing the wealth” or “raising prices”. As a business owner that works with a ton of other business owners I can tell you that nothing is further from the truth. In fact, while employees are getting paid, or customers are getting their product or service it is often the business owner that is barely scraping by after paying out payroll and expenses.
Because business owners are the last one’s to get paid many fail to setup one proper procedure that limits their personal liability should the business ultimately fail, and creditors start circling. This past month we discussed the piercing of the corporate veil. Unfortunately, many business owners inadvertently do this by comingling business and personal funds. What follows are actual cases we have worked where the piercing of the corporate veil is what led to the problems the business owner was having.
A small business owner split from his partner and closed his business. One owner went to work for another company, the other owner started a similar business on his own. This split left five of their employees without work, which caused them to file for unemployment. When the Department of Labor went to open the case, they were unable to find an unemployment insurance account for the company. In fact, upon further review the business had not been paying any sort of payroll, sales or business taxes.
This failure allowed for the Department of Labor, along with the State Tax Commission to issue garnishments for the past taxes and insurance payments to the business owners, even though the business was closed. The entities reached into the personal accounts of the business owners for an amount that the entities determined was owed.
We were engaged by one of the business owners to review the tax and payroll records to see if the entities pulled too much, or not enough. One of the obstacles we ran into was that the other partner was not cooperative in providing information. Based on the information we had, using a fifty percent split between the partners we found that the taxing entities may have pulled more funds than what was actually due. It took nearly a year to negotiate a refund with the entities.
The failure to pay taxes cost this business owner not only the cost of the taxes, but penalties from the entities. It also took considerable time to respond to notices in addition to bank fees for garnishments. The stress from this issue weighed heavily on the business owner and affected the operation of his new business along with family/home life issues. It also cost the business owner a considerable sum to pay our firm to work with the entities for several hours each month to get his refund.
Personal versus Business Banking Accounts
I hear from business owners all the time wanting to write-off expenses that they believe should be business related but are actually for personal use. This particular client had been warned repeatedly about using her business bank account for personal use.
Because this business is actually owned by an individual from outside of the United States yet operates within the Country it is setup as a “C” Corporation. However, the business owner operates the business and bank account more like a Single Member Limited Liability Corporation by taking draws against the business instead of taking payroll.
Each month when we reconciled this account there were numerous charges for personal items. These charges include everything from fast food, clothing, automotive repair, groceries, fuel, etc. This is in addition to utility charges, professional fees, advertising, etc. that is related to the owner’s business.
Awhile back this business owner ran into legal trouble and left the Country. This caused the business owner to change the way the bank account operated with collecting receivables and issuing payables. Although told what she was attempting to do was illegal, the owner attempted to launder money through the US account to a foreign bank account. Fortunately, investigators were able to catch this quickly and shut it down.
While the business is still in operation it is not known how funds are making it back to the business owner at this time. The owner continues to reside outside of the United States and investigators are continuing to pull garnishments out of the businesses US bank account.
In our White Paper and Video Series we provided tips to keep businesses from piercing their corporate veil. The easiest way to do this is to not comingle personal and business expenses. It is also important to work with your legal and accounting professionals to ensure your business entity is setup correctly and operating appropriately.