Why Do I Need a Corporate Veil

Keeping Personal separate from Business

It is important that as a business owner you don't mix personal and business funds (expenses and income). Mixing funds or co-mingling funds is a downfall for many business owners that leads to heartache, disappointment and audit concerns to the IRS.

Why can't you mix funds?

In order to comply with basic accounting rules and IRS Code your personal funds should not be used for the business you own. It leads to audit exposure as well as possible fraudulent activity concerns It opens your personal assets and wealth to litigation as well since you broke the "Corporate Veil."

How to Avoid the Co-Mingling

Separate Bank Accounts

Make sure you open a business checking bank account as well as a business savings account using the legal business name, EIN and more. This will create the ability for you to have separate funds for the business and personal. This is, after obtaining an EIN and forming a business, the next most important step. Get your monies separated so you can track personal vs business. You should get a business debit card for your use as well.

Starting Out

When you first start out your business, the business might not have enough clout to have a credit card in it's own name. What to do? You, the person, need to create a loan document between yourself and the business. By doing so, following all the basic loan guidelines, you can then loan the business money to make payroll, buy assets and start the business. These funds loaned to the business are known as 'Capital' or "Owner's Capital' and are a benefit to you, the owner, as the business starts to grow.

What if I have a Shortfall later on?

If you have a shortfall in business funds later there are various steps you can take. First, you can loan the business some more money. You would do this to meet your accounts payable demands, purchase more equipment or supplies etc. Just like the Beginning Capital, it is important you put a loan document together to prove the infusion you gave the business.

Second, if you don't have means to loan yourself money you can get a loan from someone else. Again, creating a loan document properly to track and document the infusion from another party.__

If the shortfall is only a shortfall for yourself or your spouse or kids who are payroll, don't take a loan from yourself (the person) to then pay yourself (the owner) or your family employees. By taking a loan to then give back to yourself as payroll doesn't make sense and causes bookkeeping transactions and paperwork to be done unnecessarily. __

Credit Cards for the Business

Many institutions now offer you, upon opening a business account, the ability to open a credit card in the business name. Do so. Even if it is a 'guaranteed' credit card. You will have credit in the business name, using the business EIN. This will allow you in the future to obtain a higher line of credit. Purchase and Pay Off._ Try not to carry a balance on the credit cards (even personal). Make sure you pay the credit card from your business checking account.

A Messy Mess if Co-Mingled

Co-Mingling funds causes undo stress for you as the business owner as well as causing headaches when an IRS review is needed. When an IRS review/audit happens you have to open your kimono. You don't want to open your personal kimono at that time. When funds are co-mingled the IRS or even agencies looking to give you a loan have a hard time seeing the true business income vs. your personal income. You can imagine the snowball effect of mixing funds. The scrutiny is high. The corporate veil is broken and if someone has an issue with your business, they can come after your personal since you, the business owner, broke the corporate veil.

Increased IRS Scrutiny

One of the key areas the IRS is now focusing on are Partnerships and SCorps that are owned by the taxpayer(s) themselves. The IRS has taken the pathway, since the passage of the TCJA (2018), that many people formed businesses to allow them to take expenses that are not allowed any more on their personal returns. As such, when you co-mingle your personal with business the IRS has a stronger case against allowing your business expenses.

Make sure you have separate accounts

Make sure you are as clean as possible

Make sure you have proper paperwork documenting loans from yourself to the business (1)