Small business owners who choose to incorporate their business usually do so to gain the liability and financial protection that comes with forming a separate entity. But this distinction between your company and you (or other shareholders) can be put at risk by certain activities. These activities can constitute what is known as piercing the corporate veil — and opening up owners to risk.
While a number of different types of activities can pierce the corporate veil, several accounting actions or failures are common causes. What are some of these actions and how can you protect yourself? Here are a few to remember.
1. Failure to Separate Personal Expenses
Probably the most common way that small business owners pierce the veil is by mingling personal and business expenses. Paying for family vacations or writing off personal purchases as business deductions demonstrates that you don't treat your business as distinct from your person. The best way to protect yourself is to learn to identify personal and business expenses, keep separate accounts, and be diligent about reimbursement.
2. Failure to Keep Accounting Records
Documenting your business operations and transactions is key to proving that you operate it correctly and that it is separate from you as a person. Small business owners often have lax recordkeeping practices, so they should consult with an experienced accountant to learn more about what to keep, how to record transactions, and how to organize their bookkeeping.
3. Improper Credit Usage
As an owner, you are responsible to run your business in an upright manner. So it should never appear that you have entered into any transactions involving credit where you didn't intend to pay back what is owed. Doing so opens up to question your intentions as a manager and an owner. So if your business shows any signs of insolvency, consult with a professional before entering new contracts.
4. Use or Loss of Business Assets
As with mingling personal and business expenses, business and personal assets should be kept separate and tracked. Using business assets, such as equipment or vehicles, as a personal asset severs the distinction between the two parts of your life. And transferring business assets to your personal control can be even more egregious. Tracking the use of company assets and reimbursement for personal use is vital.
Where to Learn More
Small business owners often find it challenging to avoid these common practices even though it puts them at personal risk. The best way to avoid unintentional trouble and start using best practices is to work with a qualified accountant. Contact an accounting service for more information. You will start rooting out any risk you may have of piercing your valuable corporate veil.