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Commingling of Business & Personal Funds (And Why It Is A Bad Idea)

Most business owners know to keep their business assets separate from their personal assets. However, there are many small business owners that do not. This is a bad idea, both legally and logistically.

If you have paid the money to an attorney or to the government to set up a business entity, whether a L.L.C. or Corporation, the last thing most people want to deal with is administrative problems and difficulties like separating bank accounts and assets. However, this is a very important step to keep the limited liability of your company in tact. In law, there is a business concept called “corporate veil,” meaning the liability shield between the business owner and the business. When you commingle your business and personal funds, creditors can “pierce the corporate veil,” and get into your personal assets through liability through your business. This the the main reason to avoid commingling your funds, although there are also tax reasons.

Today on Tulsa Estate Planning Blog, let’s discuss the legal reasons to not commingle your business and personal funds and the ways to avoid commingling.

How do you “commingle,” and what is “commingling?”
When you commingle your funds, you are treating your business funds as your personal money, whether buying or selling. Some of the most common ways to commingle are:

  •     Transferring money between business and personal accounts without documentation.
  •     Writing business checks for personal reasons/expenses, and vise versa.
  •     Having only one bank account for personal and business needs.
  •     Depositing business checks into your personal bank account.
  •     Withdrawing money from your business account to pay personal expenses without documentation.

It is very important to keep your corporate veil intact. As discussed above, when you commingle, your corporate veil can be pierced. Essentially, all the work that you did when forming the L.L.C. or corporation, such as filling the Articles of Organization, paying attorney or filing fees, and perhaps drafting the Operating Agreement, will be for nothing as far as limiting liability. Creditors can reach your personal assets if you commingle, and there in lies the problem with commingling.

How to avoid commingling.
First of all, the impulse to put your business check into your personal check is understandable for a small business owner. After all, you want to pay yourself and buy more supplies for the business to grow more. However, there are several reasons why  you need to deposit the check into the business bank account, and then pay yourself, and also buy business supplies out of the business account.

The first thing you should do is create a separate bank account if you have not already and document all expenses, withdrawals, and deposits. Documenting allows you to become a better bookkeeper for your business, and/or keep better records for taxes. Having better accounting by keeping separate bank accounts and only using business funds for business expenses can help you see how your business is performing, and seeing where you need improvement. It also allows you to keep your personal funds separate and helps create a personal budget since you will not be seeing business funds in your bank account.

Reducing Taxes.
One last benefit we will mention is the benefit to your taxes (and its easier for your CPA). One big benefit is that the IRS does not allow you to deduct business expenses that you cannot document. When you have one business account for personal and business expenses, it is hard to explain to the IRS what you need to deduct and for what purpose. The IRS is a lover of documentation, and by keeping track of your business income and expenses in its own business account is crucial to help minimize taxes and maximizing your deductions.

Many, if not most, small business owners pay more in taxes than they are required to because they do not have an organized system of keeping records and recording expenses. By simply creating a separate business account, and avoid commingling funds by using business money for personal expenses, you can create a more organized and efficient way to reduce liability and taxes.

If you need help organizing and/or creating your business, please contact the office of the Skillern Law Firm and see if we can help you.

What is an S Corporation?

Many people do not know what an S-Corporation is, and how their business can take advantage of the taxes associated with such an entity. Let’s go through this sometimes elusive business entitty today on Tulsa Estate Planning Blog.

An S Corporation is defined by the Internal Revenue Service, and business entities that select this kind of organization must elect S status through the IRS.  In order to claim this designation, there must be 75 or fewer shareholders.

An S Corp is like an LLC in that the shareholders are not liable for the debts of the corporation, unless in the case of fraud or mismanagement. Annual meetings, filings and reporting is required. Further,  a board of directors and officers must be maintained.

As with an LLC, a state filing fee is required. Unlike an LLC, however, management cannot be determined by operating agreement. In an S Corp, the officers must manage day to day corporate activities. Directors manage the officers and the overall company. Directors are elected and are therefore managed by the shareholders.

This is the most complex entity to dissolve, so if you are wanting a corporation for a small amount of time, an S-Corp is not the best option.

If you are interested in changing your business to an S-Corp, or creating a new company with this tax scheme, then please contact the offices of Skillern Law today!

The Season of Charitable Giving

In the season of giving, clients often ask us about charitable giving and its tax implications. There are several options to those individuals with a generous heart. Charitable Foundation Trusts, or “private foundations” with Tax-Exempt status are expensive and time-consuming to create. Individuals with thousands of dollars to donate, however, would be wise to create a private foundation or public charity for tax reasons. If you are not one of the lucky individuals with thousands of dollars, however, charitable giving is a admirable choice. Charitable donations can also reduce tax liability. Certain kinds of gifting, however, is income and estate tax deductible, so lets go over the the IRS’s guidelines.

To take advantage of the income tax benefits of charitable giving, a donation must meet requirements established by the IRS. These include these rules: 

  1. The donor cannot benefit from the donation. This includes giving to foundations or organizations where you or your family can benefit, or you are directly benefiting.
  2. The donor must be able to substantiate the donation. You must be able to keep a written record or bank record of the donation that you could prove as valid to the IRS.
  3. The donation must be made to or for the benefit of a qualified charitable organization, and;
  4. The donation may not exceed the current statutory ceiling. As of right now, the amount of your deduction for charitable contributions is limited to 50% of your adjusted gross income.

Now, let’s make a distinction between the income tax and the estate/gift tax sides to charitable giving. If it goes to charity, it can be deductible from your estate. If it goes to loved ones, it cannot. Remember, the donor cannot benefit from the donation, and giving to your family is seen as a benefit to the IRS. Pretty simple distinction, right? The gift-tax limit, as of right now, is $13,000. You can give up to that limit to a family member or friend and not pay tax on the gift. If it goes above that – you’re out of luck and the gift and tax must be reported to the IRS.

Another part of this complicated IRS tax equation is instance in which you can give to charity and it will be deductible if  the charitable gift it is made as part of your will or trust. This is why people like Bill Gates and Warren Buffet can give their kids up to 5 million dollars – and pay no estate tax if they give their other billions to charity through their will or trust. You can give after you are deceased through your will or trust, and not have to pay estate tax! While there is no current estate tax in Oklahoma right now, it will likely come back in the future, so you should consider this when drafting your will or trust.

While it is the season of giving, you can give wisely and help your estate by using tax-savings benefits that the IRS has set up for generous individuals. Please consult with us today if you are interested in creating a private foundation, or would like to create or put charitable givings in your will or trust to save your beneficiaries some taxes in the future.

Don’t forget to read other posts at the Tulsa Estate Planning Blog.

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