Piercing the Corporate Veil of a Limited Liability Company

Commingle Funds and Your Liability Shield May Disappear

Now that you have taken to heart the information provided in the previous post, Does your “LLC” really limit your liability?, don’t jeopardize the shield created between your business and your personal assets. I have often heard the phrase, “As a business owner, it is not ‘if’ you get sued but rather ‘when’ you get sued.” In determining whether a business owner is personally liable for the debts of a n Ohio Limited Liability Company (presuming the business has not been used for criminal or fraudulent purposes), courts evaluate a number of factors, particularly whether the owner’s personal funds have been commingled with the funds of the business. Frankly, if you treat your LLC as your personal piggy bank by using your company’s funds as your own, there is a good chance your personal assets will be exposed to your company’s creditors (e.g., Plaintiffs suing your company).

 

Commingling takes a variety of forms, including but not limited to:

  1. Failing to establish company checking and credit accounts that are separate from your personal accounts;
  2. Utilizing company credit cards or accounts to pay for personal expenses;
  3. Loaning money to or borrowing money from your LLC, WITHOUT DOCUMENTING THE TRANSACTION (for example, record a resolution in the corporate minutes, execute a valid promissory note with fair market rate interest, and ensure that regular payments are made);
  4. Depositing company funds (e.g., checks payable to your company) into your personal account; and
  5. Failing to properly title company property.

While the list set forth above is by no means exhaustive, it does provide an overview of the most common examples of commingling that you should avoid. In addition to risking exposure to personal liability, commingling often results in understating or overstating deductible business expenses, as well as difficulty in creating financial reports and determining the best direction for your company.

Do not succumb to sloppy business practices, and be sure to document, document, and document. In the event that commingling does occur, correct it immediately. Maintaining the separation of owner and business is a critical component to protecting your personal assets. The goal of our business law attorneys is to ensure that your business operates in a manner that protects you personally. If your company is a mess, and you need help cleaning it up, then it is time to sit down and have a quiet conversation with us.

 

- “An ounce of prevention is worth a pound of cure.” Benjamin Franklin

 

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