Rick is one of several subscribers involved in the process of forming a new comp

Question

Rick is one of several subscribers involved in the process of forming a new company, Pets-n-Me. She is also in the process of buying a new personal residence. Jill wants to pay the legal fees associated with the purchase of her new home from corporate funds by charging them to the corporation's Organization Costs account. "I'll have the accountant mix them in with the corporation's legal bills. No one will ever notice," says Rick. What are the ramifications for this and how to go about letting the person know.

Explanation / Answer

Rick should be made to understand that the biggest problem with doing this in a corporation is that you are not acting like a corporation. A corporation is a separate legal entity. And therefore, it really should not be paying the personal expenses of the shareholders. Should someone take legal action against the corporation, and this type of activity is discovered, someone could easily point to these personal payments as proof that this so-called corporation is not really a corporation, and you would then lose the benefit of limited liability. This is known as "piercing the corporate veil" and you definitely don't want to go there.

Regardless of the legal consequences, Rick should also keep in mind that you cannot treat those personal expenditures as a business expense, no matter what kind of legal entity you own. So just because you happen to write a business check to pay for personal expenses doesn't turn that into a deductible business expense.

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