Business insights and growth highlights

Avoid Piercing The Corporate Veil When Payroll Is Delayed

Feb 24, 2022 by Morris Reichman

“Piercing the veil” is a term that gets tossed around a lot, particularly when a business has taken part in actions that break the law. However, many people do not fully understand the meaning of “piercing the corporate veil.” While an LLC or corporation has little to worry about if they are not practicing any egregious offenses like money-laundering or defrauding investors, it is still worth your time to understand the definition of the term and learn how to institute corporate veil protection policies throughout your organization.

Most businesses are designed so that investors, directors, and other stakeholders have limited liability in the event of wrongdoing on the part of the company as a whole. In other words, if a business cannot pay its debts or mismanages its affairs, there are legal protections in place to safeguard the vast majority of stakeholders from taking the burden of responsibility.

However, if a business engages in acts that are so egregious that courts need to get involved, there is the risk that the court will choose to “pierce the corporate veil.” In doing so, certain stakeholders will no longer be protected by limited liability. Instead, the courts will hold individual stakeholders and directors personally liable for any wrongdoing, unpaid debts, or illegal activity.

Naturally, this is a situation that every business wants to avoid at all costs. And while courts do not institute this kind of legal action without just cause, the laws dictating how and when piercing the veil can be implemented vary from state to state. Therefore, it is in every company’s best interest to invest in corporate veil protection.

Additional Benefits Of Separating Business And Personal Finances

One of the most common reasons that businesses lose their limited liability protection is the improper management of assets. More specifically, one or more stakeholders might use business finances for personal use or make false statements on official business finance documents like tax returns. In any case, this is one of the main reasons that all business owners and stakeholders should keep their business and personal finances separate. Additionally, there are other benefits that make this practice even more enticing and practical.

BUSINESS EXPENSE DEDUCTIONS
If you mix your business and personal finances, it makes it much harder to properly delineate between the two when you’re filing your taxes. This is true whether you’re filing your personal tax return or your business’ tax return. In either case, you may struggle to find the best tax writeoffs if you fail to manage your bookkeeping in a way that clearly defines your business expenses and your personal expenses.

Even if you’re not worried about losing out on potential tax writeoffs, poorly documenting your business expenses can raise red flags with the IRS. If you appear to be misappropriating funds or lying about your business expenses, you could get audited. A tax audit will open the door for the IRS to investigate every dollar flowing in or out of your business. If a tax auditor finds that you have been getting fraudulent tax writeoffs, you could face steep fines and risk losing your limited liability protection.

QUALIFYING FOR BUSINESS LOANS
Typically, you have to provide ample documentation of your finances when applying for a personal loan. The qualifications for a business loan are even more stringent. If you fail to practice proper business bookkeeping, you could lose out on much-needed funds. Even if you eventually get all of your books in order, the delay could end up costing your business thousands of dollars.

Additionally, the better your bookkeeping, the better your chances of getting a worthwhile loan. Lenders are far less likely to offer their best interest rates to a business with subpar finances or financial documentation. So, always make sure to keep diligent records of your business assets and expenses and ensure that they are kept completely separate from your personal finances. This way, you are in a much better position to qualify for a business loan that will actually help your company prosper.

Best Practices For Separating Business And Personal Finances

While it’s easy to see that mixing business and personal money can lead to a myriad of issues, it’s not always easy to know exactly how to separate business and personal expenses. Fortunately, there are various ways to keep your books clean and ensure that your personal funds do not intermingle with your business assets. Here are a few of the best practices to follow:

OPEN SEPARATE BANK ACCOUNTS
While you likely already have a personal bank account to manage your day-to-day finances, you may not have a business bank account for your commercial endeavor(s). This is a huge mistake, as it can make it extremely difficult to differentiate between personal and business expenses. In addition to opening a business bank account, many business owners and stakeholders apply for a business credit card. This way, you can get immediate access to credit without having to jump through the hoops of a traditional business loan.

SET A SALARY FOR YOURSELF
If you are the sole owner or CEO of your business, then you need to ensure that your financial profit from the business is clearly defined. If you simply skim a random amount off the top of your company’s liquid assets, you run the risk of invalidating your bookkeeping efforts from the start. Instead, set a predetermined annual salary for yourself. This way, you can ensure that both your personal and business income amounts can be ascertained, especially for tax purposes.

HIRE EXPERIENCED BOOKKEEPERS
If you run a very small business, you may be tempted to do all of the bookkeeping on your own. However, if you manage numerous employees or departments, you will almost certainly need to hire a professional accountant to manage your bookkeeping needs. This will greatly reduce the risk of improperly mixing business and personal expenses, as you will have an extra pair of eyes keeping track of your business’s cash flow.

Obtaining A Small Business Loan For Payroll When Payroll Is Delayed

If you’re struggling to manage cash flow and bookkeeping when it comes to payroll, this is a situation that can quickly spiral out of control. As a business with employees, you have to ensure that they are paid on time. This is one of your most important business expenses that must be kept up to date at all times.

Unfortunately, if your business experiences cash flow issues or revenue declines during certain parts of the year, you may have to deal with delayed payroll. Not only does this cause a serious issue for your employees, but it could put your business finances in jeopardy as well. Thankfully, you can always look for help with payroll financing.

Unlike a traditional business loan, a loan from a payroll funding company allows you to get an immediate injection of cash to pay your employees. If you work with a company like Payro Finance, you can have peace of mind knowing that you will get reasonable payment terms and low interest rates. This way, you can keep your business running smoothly and manage your bookkeeping with greater accuracy.

So, is a small business loan for payroll right for you? If you’re interested in learning more about the advantages of payroll funding, feel free to reach out to Payro Finance today!

Morris Reichman

hello@payrofinance.com

Morris Reichman is the founder and CEO of Payro Finance. Former Vice President at Infinity Capital Funding an alternative finance company, Morris possesses a versatile background in the finance industry. Having spent 7+ years working across global macro operations and start up corporate finance Morris's expertise is in business accounting, risk management and investment analysis. Morris founded Payro Finance to support business owners and ensure their business continuity.