Don’t Become an Alter Ego to Your Business
Many individuals know that corporations, limited liability companies, and other business entities are separate legal entities from people—specifically, their owners, directors, or managers. That’s one of the benefits of opening a corporation, limited liability company, or other business entity. Generally, the company’s assets are not yours, and your assets are not the company’s.
There are ways around that separation. For example, signing a personal guarantee on a loan would subject the individual owner for liability for the company’s debts. But many aren’t aware that they may be doing things in the day-to-day operation of their business that could also jeopardize the legal separation between company and owner.
Making You and the Business One
In many cases, particularly with smaller businesses with sole owners, the line between company and owner blurs, when the assets of one are used for another. For example, owners who pay for personal expenses with company accounts, or vice-versa, can open the door to a creditor saying the owner and company are the same. Owners who use a company car for their daily, personal, chores, may be at risk as well.
There are many names for this. Often it’s called commingling, or “alter ego” theory, where the company is simply an alter-ego for the owner (or vice versa).
This isn’t to say that an owner can never use a company card or account to pay a personal expense. If you are going to use company money or property, the best advice would be to:
- Keep it consistent. If the company pays your car payment, it should always do so. The payment amount should be consistent as well. Better yet, instead of piecemeal payments for various expenses, figure out how much you use from your company monthly, and just increase what the business is paying you by that amount, so it’s consistent, and simply qualifies as salary (there could be income tax consequences for doing so).
- Document it. Make sure your corporate books and records show what’s being paid where. Most alter ego problems come from bad accounting records. If the company pays for 10 of your meals a month, make sure it’s documented in the company books as an expense.
- Create a resolution. Unfortunately, most small businesses don’t follow such formalities, but they help. If you will use the company’s card for a personal vacation, draft a quick resolution from the business authorizing it.
- Avoid direct account transfers. Businesses that show random and frequent money transfers from business to personal accounts are ripe for creditor claims of alter ego.
The Risk of Alter Ego Claims
The risk in being an alter ego to your company is that if one is sued, the other could end up paying the judgment. You don’t want your company having to satisfy your personal credit card judgment, just as you don’t want a creditor of the company coming after your personal bank accounts for repayment.
Don’t think of your company as a secret hideaway for your assets. See an attorney about how to maximize the benefits of your business.
Don’t risk your business’ assets. Do asset protection the right way. Contact Tampa business attorney David Toback to discuss your needs and discuss how to make sure that you’re protected.