Does Paying Personal Expenses From Your Business’ Account Create Liability For Your Company?

Piles of money to represent Paying Personal Expenses from Business AccountLast week’s highly publicized investigation into a well-known New York business and its practices by the Manhattan district attorney caught the attention of many. Criminal investigation and politics aside, we want to use the Manhattan DA’s subpoenaing power to show how easy it is for a third party to obtain company banking records. What are the implications for paying personal expenses out of the business’ account? Does paying personal expenses for yourself, your family, employees, and others subject your company to liability?

Although the motivations for the subpoenas are focused on the criminal end, it should be noted that if a company pays education tuition, medical, or any other personal expenses from company funds, corporate barriers that protect an owner’s personal assets risk coming down.

Normally, if a person owns a corporation and a judgment is entered against that corporation for an outstanding debt, the only assets at risk of judgment enforcement are those of the corporation.  The owner’s personal assets would not be at risk for corporate debt unless the owner signed a personal guarantee of the debt. Presumably, the creditor would sue both the corporation and the guarantor or owner at the same time.

However, if a person pays their personal expenses out of the company account and the creditor obtains proof of this, and no personal guarantee exists, the creditor has the option to go after the owner’s personal assets.

Why Paying Personal Expenses From Your Business’ Account Puts You At Risk

The creditor could sue both the corporate debtor and the owner as alter ego of one another. This is called “piercing the corporate veil.” A creditor could bring the claim that the owner and the company are not respecting the legal boundaries of corporate formation due to the personal debt payments on the company’s account. In such instances, courts can ignore the limited liability status of a corporation or LLC and hold its officers and owners or members, at least the ones responsible for wrongful transactions, personally liable for its debts.

If this happens and the court finds the owners and/or officers liable for the debts, their personal bank accounts and assets could be used for judgment enforcement related to the company’s debt. For a court to find that piercing the corporate veil is a necessary remedy, the court would need evidence of:

  • A commingling of personal assets of the owners and/or officers and the company
  • An owner or officer’s mortgage payment or child’s tuition paid out of the company account
  • A check written to the corporation deposited into the owner or officer’s personal bank account.

The best way to avoid exposing your personal assets to company-related judgment enforcement is to:

  • Make sure the corporate filings of the entity are up to date with the secretary of state in the jurisdiction where the corporation is located
  • Maintain separate bank accounts for the corporation and the owners and/or officers
  • Ensure that all transactions for each respective entity are separately maintained, without any commingling of funds
  • Do not pay personal expenses out of the company’s account.

If you have questions about a commercial debt collection matter, reach out to our firm for a consultation.