Idaho Business Law Keeping Your Corporate Finances Separate

By Lane V. Erickson, Idaho Business Attorney

Starting a new business is almost like having a baby in your family. At the very beginning, it is very exciting, especially watching the business grow and become more than it was in the beginning. However, as with a brand new baby, there are some sleepless nights, and likely some very difficult days as well. Like caring for and nurturing a child, it is vitally important that you continue to follow all corporate formalities to keep your corporate status in place. This includes making sure that your corporate finances always remain separated from your personal finances.

At the Racine law office our team of Idaho business attorneys understand the importance of making sure that a client’s corporate finances be handled correctly. We have helped numerous clients understand and meet corporate record keeping legal requirements, including corporate finances, for more than 70 years. Our team is made up of partners Lane Erickson and TJ Budge, and attorneys Nate Palmer and Dave Bagley. Our attorneys have decades of experience, knowledge, and skill in helping business clients deal with all of their business needs including the business’s finances.

The purpose of this article is to describe what corporate finances actually are, why it's important that the corporates finances are kept separate from any other type of finances, and the results that could happen if the owners of the business do not keep the corporate finances separate. This article is only meant to be a short summary of these topics. If you have questions that this article doesn’t discuss, you should consult a qualified Idaho business attorney.

The place to start is to discuss exactly what corporate finances are. To keep it simple, corporate finances are all the money that either comes in or goes out of the business. Additionally, corporate finances also means the actual accounts that are used for all the financial transactions of the business.

An example will help illustrate. Let's say that you just started a car wash business under the name of Squeaky Clean Cars, LLC. This business should have its own separate bank accounts which could include both checking and savings accounts or other types of accounts. The most important thing is that they are in the name of the business and not in the name of the owners. Often this requires getting an EIN (tax ID number) from the IRS in order to open a business account. (If you don't know what this means, or if you haven't yet done this for your own business, don't panic, we can help.)

After opening for business let's assume that you had 150 cars come in to be cleaned one day. The gross amount of money that the business earned that day was $3,500. This $3,500 should be deposited directly into the business’s bank account. It should not go into your personal bank account. It should not go into the bank account of a different business. Additionally, the money should not simply be held in a wall safe of the business. By depositing the money into the business bank account, you now have a corporate record of the corporation's finances for the business operations.

If the company has expenses, the company uses its bank account to pay for those expenses. For example, the company may have to pay for cleaning supplies, or utilities such as electricity or water, or to pay employees for the work they did for the day. Payments for these expenses should be made from the corporation's own account. Now the corporation has a record of expenses that were paid during the operation of the business.

So what does it actually mean to keep corporate finances separate. This is also a pretty simple concept once you grasp it's meaning. This simply means that as the owner of the business, you should use the business bank accounts to pay for business expenses and your own personal accounts to pay for your own personal expenses. Again, an example will help illustrate what this means.

Suppose that there is $1,000 sitting in the corporate bank account. You realize that you need to make a house payment of $750 for the mortgage on the home that you live in. In this circumstance, what you should not do is use the corporate checkbook to pay your personal home-mortgage payment expense. Rather, what you should do is use the corporate checkbook to write a check to yourself as either a salary, or a draw, or a distribution, however your accountant tells you would be best. This check is then deposited into your own personal bank account. Once the money is in your bank account, then you use your personal checkbook, to write a check to pay for your house payment.

If you handled the corporate finances in any other way, then the law may determine that you are commingling your corporate finances with your personal finances. This could be a devastating legal determination because it has a direct impact on whether the law actually recognizes that you own a corporation in the first place. If the law determines that you do not actually have a corporation, because you have commingled funds, this means that any liabilities that arise in the business, are actually your own personal liabilities rather than being corporate liabilities. In other words, this means that you have lost the corporate shield that protects you individually from all corporate liabilities.

If the law determines that you have commingled funds and that you no longer have the corporate shield in place, this means that any creditors of the business can come after you individually to pay for the liabilities of the business. This would be a terrible problem because the main reason most individuals start a corporation as part of their business is to separate the business from them personally. Most individuals do not want to put their own personal assets including their money, their property, or their other assets, at risk for the liabilities of their business. If the business is not successful, and it ceases to operate, most people want to walk away and not have a pile of debt that needs to be taken care of.

If the corporate shield does not exist, then you are personally liable for all debts of the business. You would also be liable for any and all injuries that occur at the corporation was responsible for. In other words, there is no separation between you and the business. The law would consider you to be the same as your business.

If you have gone to the trouble to create a corporation, you need to take every step possible to maintain the corporate shield including handling corporate finances correctly. We have assisted numerous business clients in the operation of their business and in keeping corporate finances separate and proper under the law. If you have questions about the finances of your business, we are confident that we can help you too.

Our team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.