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Let's say there is a small business owner of a business that employs 30 people. From time to time, that business owner takes and/or borrows money from the business for personal expenses, like home improvements.

Question: What, if anything, is "wrong" with this? Take "wrong" however you want: ethical, legal, strategic, or any other way.

I think this is a legitimate question for this site, because I have recently encountered some who has condemned it as "very wrong", and yet I want to understand what specifically is wrong with it, both as general personal finance knowledge as well as knowing what not to do should I find myself a business owner in the future (which is always a consideration). The one that occurs to me is strategic, in that mixing personal and business monies in this way could cause a judge to pierce the corporate veil and make the owner personally liable in case of a lawsuit against the company. But I am really unsure of the other reasons it might be wrong (though I suspect, at least, tax issues).

Edit: this is in the United States, and the business sells a service to the public.

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    Since we know nothing about the business and the laws in the area where it is managed - there's no possible way for this question to receive any answer other than a guess. – littleadv Oct 25 '13 at 4:30
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    Why the downvotes? How is this not a personal finance matter that asks for specific answer(s) to an actual question? If it is due to the lack of locale or specifics of the business, I've added them. – Chelonian Oct 25 '13 at 5:20
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    The question might be a good one if only it were phrased differently. Perhaps - "I own a small business..... how do I distribute profits to myself during the year, or at year end?" But then, this question isn't bad, so much as it's off topic on this board. – JoeTaxpayer Oct 25 '13 at 11:49
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    Before this question is closed off topic - regarding "takes and/or borrows money from the business for personal expenses, like home improvements." look up Leona Helmsley. There's distributing funds from one's company in a legal way, declaring the income, etc, and then there's fraud. – JoeTaxpayer Oct 25 '13 at 13:36
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    Joe, exactly. And by mere knowing that the owner distributes money to him/herself - you cannot tell if he/she is doing anything wrong. – littleadv Oct 25 '13 at 17:30
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If you are the only owner: then morally there is nothing wrong with this, as long as you make sure that everything is tracked so that you pay the proper taxes from the correct entity.

The danger for you and your business is if the transfers aren't planned. Because you may not be re-investing enough of the profits back into the company. That means that the equipment may be aging but you aren't replacing it, it can also mean that you aren't spending enough on business development.

If you pay yourself so much that you bankrupt the company that isn't good. If you live the good life but starve the employees and they realize it, or if you starve the business and the employees realize it; then you might have a problem motivating and retaining employees.

7

It's wrong in several situations:

One, the business owner counts this as a business expense, which it is not, and therefore reduces the company's profit and taxes. That would be tax evasion and probably criminal.

Two, someone who is not the sole owner counts this as a business expense, which it is not, reduces the company's profit and when profits are shared, the company pays out less money to the other owners. That's probably fraud.

Third, if the owner or owners of a limited liability company draw out lots of money from the company with the intent that the company should go bankrupt with tons of debt that the owners are not going to pay, while keeping the money they siphoned off for themselves. That would probably bankruptcy fraud.

Apart from being wrong, there is the obvious risk that you lose control over your company's and your own expenses, and might be in for a nasty surprise if the company has to pay out money and there's nothing left. That would be ordinary stupidity. If you have to tell your employees that you can't pay their salaries but offer them to admire your brand new Ferrari, that's something I'd consider deeply unethical.

  • It's one or more kinds of illegal to not pay your employees the wages you promised them for work hours they've already completed. – stannius Apr 24 at 23:26
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I'm no expert on this, but I would say that, if you own the business entirely yourself, there is nothing terribly wrong with using it for your own purposes as you would any other asset that you own. What is wrong is not keeping accurate records that distinguish between your money and the business's. As you say, this is wrong strategically, but it can also be dangerous legally, because if you mix your money and the business's money and don't keep track, you could find, for instance, that you've failed to pay the taxes you were supposed to.

There is also a concern that might not fall under what people refer to as "ethics" but more "good corporate citizenship". Basically, people tend not to like companies that just shovel all their gains into the owners' pockets. This is especially true if there are ways the money could be used to improve the business. In other words, if you're able to live high on the hog with the profits while paying all your employees a pittance, the public may not look favorably on your business.

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    You can also open up your personal assets to potential liability claims on the business even though the business may be incorporated in a way that would normally protect those assets. – Chad Nov 26 '13 at 21:25
  • This answer is not correct. Even if you are the only owner there are problems with taxes and serious problems if the business is a limited liability one. See @gnasher729's answer below. – Rad80 Aug 29 '18 at 9:24
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This is a SUPER bad idea.

It is exactly like you said: "piercing the corporate veil"

to understand why this is bad, first you must understand why we set up corporations as a legal entity. this is to protect the owners from liabilities against the corporate entity.

But if the owners and the corporate finances are mixed into one big random pot, the corporate veil is pierced.

meaning whatever liabilities against the corporate entity will now be spilled over to the owners.

This is a terrible idea...

It is bets to keep the two entities (private and corporate) separate.

This isn't a moral issue.. this is a legal/liabilities issue.

there is no morality question here. . setting up a situation where the corporate veil is pierced... defeats the whole purpose of having a corporation in the first place (for a small business)

  • That assumes there IS a corporate veil. What if the small business is a sole propietorship - no corporate veil to start with. And yes, there are quite some scenarios where this is what it is - i.e. I can not even start hiding most of my financial transactions behind a coporate veil. Every broker would want a personal liability paper signed. – TomTom Apr 24 at 18:36
  • @TomTom: small sole proprietorship.. you can do whatever you want... it actually makes no difference.. but the OP seems to suggest a company of 30.... which is unlikely to be a sole proprietorship – sofa general Apr 24 at 19:17
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    In a corporation, the owners can take money out by issuing a dividend. Done properly, it does not pierce the corporate veil. – Ben Miller Apr 24 at 19:20
  • @Ben Miller: ensuring the veil's integrity is pretty simple.. . Just keep the money and accounts apart. but the OP's question of whether there are moral issues with mixing account. . the real answer is no, provided all the taxes are paid... but it opens him to personal legal liability issues – sofa general Apr 24 at 19:24
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    @sofageneral I don’t think the OP’s question implies that the owner was doing anything illegal. – Ben Miller Apr 24 at 19:44

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