Piercing the corporate veil

13 Replies

I just formed an LLC and opened a business checking account. When flipping houses I use my Home Depot credit card to make purchases for supplies, appliances etc and pay off once I sell. My question is since this Home Depot cc is in my personal name, could making payments from my business checking possibly pierce the corporate veil. I'm going to try to add my business to the card if I can but with it being a newly established LLC I'm afraid my credit limit will significantly decrease. Thoughts?

As long as you properly account for the expenses and get reimbursed by the company it should be OK.  Lots of company employees have miscellaneous expenses that their company reimburses them for. 

I am not an attorney the above is my laypersons understanding of the law and is not intended as legal advice for your specific situation.

Great points above. However, I have credit business accounts at the big box store no problem. 10k per month limit. I just have to sign a personal guarantee. Then it all runs through my business.

@Belinda,

Consider building credit in your LLC. Start with net-30 lines and build up toward being eligible for business credit cards.

You will need to provide a personal guarantee in the beginning. Eventually, your businesses will stand on their own.

When your LLC can get enough of its own credit, start using the LLC's credit first and avoid "cominingling". Your accountant and tax attorney can help you figure out how to do it right and legally.

LLC are limited liability companies not corporations. State legislatures specificly designed them because courts were ignoring the legal protections for small closely held corporations finding ways to "peirice the corporate vail" for not following corporate governance such as holding board of directors meetings keeping minutes, ect. This was hampering business start ups as business people would not start new businesses as they feared putting thier personal assets at risk with an ever increasing litigious environment. While every state is different most LLC statutes provide strong asset protection as long as it's a bonafide business venture. Like @Ned Carey said it is no uncommon for businesses to reimburse for supplies, but even if you don't do reimburse yourself, buying materials for your business is considered a contribution of capital, no different than the money you put in to start your business, this is a long way of saying your fine don't worry.  Hope this helps good luck!

the only legal advice I could give you is to get a qualified legal advice from someone that is licensed and actually practices law and not from Internet forums...

Originally posted by @Joseph Gozlan :

the only legal advice I could give you is to get a qualified legal advice from someone that is licensed and actually practices law and not from Internet forums...

I disagree with strongly that statement.  It is true one should not act on uncorroborated advice of any type from the internet. However advice and comments from the internet can help you understand the law and better prepare you for a meeting with a legal professional. 

There are many experts here on BP, some so much so that they know significantly more than the average attorney on their subject matter.  I know tax lien law in MD better than 90% of Maryland attorneys. Not just the law but also how judges rule on a daily basis and Court precedents set by the Special Appeals Court in MD. In fact attorneys have come to me to learn about tax sale investing.

I am an attorney, and I've looked at veil piercing in a number of states. Generally, piercing the veil requires something akin to using the entity as an alter ego and is a pretty high standard to meet. Commingling funds, disregarding all corporate formalities, using the entity to commit fraud, etc. Every state has different factors. I haven't looked at your state's law, but I would be surprised (probably even floored) if simply having your LLC reimburse you for supplies would in any way constitute a basis for piercing the veil.

Originally posted by @Ned Carey :
Originally posted by @Joe Baron:

the only legal advice I could give you is to get a qualified legal advice from someone that is licensed and actually practices law and not from Internet forums...

I disagree with strongly that statement.  It is true one should not act on uncorroborated advice of any type from the internet. However advice and comments from the internet can help you understand the law and better prepare you for a meeting with a legal professional. 

There are many experts here on BP, some so much so that they know significantly more than the average attorney on their subject matter.  I know tax lien law in MD better than 90% of Maryland attorneys. Not just the law but also how judges rule on a daily basis and Court precedents set by the Special Appeals Court in MD. In fact attorneys have come to me to learn about tax sale investing.

Ned,

My post was not intended to reduce anyone's credit on this post or in this great community  at all. It was only a word of caution to the op to keep in mind that the statement "I read it in a forum on line" never held in court as a defense...

When I ask questions about how to flip a house, market to owners, drive for dollars etc. I understand the risk I'm taking and willing to weigh it against the risks such advice could bring with it. 

When asking about piercing the corporate veil this is not as simple as reading an article online. Asset protection is a specialty so unique that even between lawyers there is a select few that really know their stuff.

I understand you took years out of your life to learn and master the lien laws in MD but how many of the posters in BP have that kind of experience and knowledges? Should the op assume anyone responding to her thread has earned that level of mastery in corporate law?

All I was suggesting is that in matters like that, it's best consulting a lawyer that parcitces corporate law in the state the op is incorporated.

Just my .02

Originally posted by @John Chapman :

I am an attorney, and I've looked at veil piercing in a number of states. Generally, piercing the veil requires something akin to using the entity as an alter ego and is a pretty high standard to meet. Commingling funds, disregarding all corporate formalities, using the entity to commit fraud, etc. Every state has different factors. I haven't looked at your state's law, but I would be surprised (probably even floored) if simply having your LLC reimburse you for supplies would in any way constitute a basis for piercing the veil.

 That's a good point John. 

The op stated "...making payments from my business checking..." (Paying the personal CC bill with cash from her business checking account)

Would that be considered commingling or reimbursement?

@Joe Baron I can't disagree with anything in your last post.  I think we can both agree on something I said in an earlier post

It is true, one should not act on uncorroborated advice of any type from the internet.

Last year, I asked my instructor for Broker Law (in Virginia) about the strength of LLCs and how people pierce the veil. He is an attorney and been practicing for decades- and he literally wrote the book on Landlord/ Tenant law in VA. According to him, it is VERY difficult to pierce the corporate veil. Of all the cases he saw, only one was ever successful, and that one there was no separate bank account at all. As long as you have a separate account, he seemed to think you'd be just fine. Additionally, he said attorneys hate to take cases on this, because they are so likely to loose... I'm not an attorney, I'm a RE broker/agent, but hope that helps you!

A personal guarantee on debt used by a corporation, which an LLC is, is not commingling funds.

Reimbursements to employees are different than to owners, it becomes an accounting function and your tax election can determine how best to account for small expenses. 

When using your business account, pay attention to what you are buying and how you will explain the receipt. If you have a company party and feed your contracts for example, record evidence of that party, have them sign a guest roster, might show the reservation for the place you use. You want an audit trail for company expenses. Writing a check to a grocery store for food and beverages will sure look like the company is paying your grocery bill! Company funds in this example can be a commingling matter and a tax fraud matter. 

Every time you use a company check ask yourself "where is my audit trail" to show the business benefit and not a personal benefit?"

See your accountant to set up your books. Good luck :)    

Great advice. Thank you all.

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