Don't Lose Your LLC Protections

AlohaMowing

LawnSite Senior Member
Location
Hilo, HI
Recently in another thread I saw something that alarmed me. I did not post there because I did not want to push that thread off topic and did not want to criticize the practices of any individual, but because there are probably many of us doing something similar I wanted to remind of the dangers.

The whole point of operating as an LLC is to limit personal liability for debts of the business. The LCO, who appears to operate his business in the form of an LLC, reported that his wife has a debit card on the business account to purchase food for the home, gas for her car, and other household and personal needs. That presents what is probably the quickest and easiest way for a creditor to pierce the corporate veil as there is no real separation between the company and its oweners. Such a debit card may be okay for a sole proprietorship, but not for an LLC, LLP, or corporation if one hopes to preserve the protections against personal liability.

Money can be taken from the LLC account as a distribution or owner's draw, but such withdrawals need to be recorded as such. The manner in which money comes out of your LLC account will not affect your taxes but failing to keep personal and business expenses separate may result in allowing your personal assets to be seized to pay business debts. See https://www.ericnisall.com/business-not-personal-piggy-bank/. The best practice is to have an operating agreement that specifies when payments to the owner(s) will occur and how the amount will be determined, and then to follow those terms. It is a little more accounting work, but it is part of operating the business.
 

kemco

LawnSite Fanatic
Location
Memphis TN
IRS prefers you don't do that even if you are a sole prop. So I've been told... By the IRS, LOL!
 

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