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My husband and his father own an LLC. I've recently started working in the office so they can be out working the jobs. I reconcile accounts every month, and my mother in law is frequently using the business account for personal expenses; grocery shopping, home decor, lunches with friends etc. My question is, isn't this a big NO NO and aren't they just asking for an audit??

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rated:
KWJ said:   My husband and his father own an LLC. I've recently started working in the office so they can be out working the jobs. I reconcile accounts every month, and my mother in law is frequently using the business account for personal expenses; grocery shopping, home decor, lunches with friends etc. My question is, isn't this a big NO NO and aren't they just asking for an audit??
  So long as they aren't claiming these personal expenses as business expenses it's not a big deal in terms of the IRS -- they are distributions to the members. The bigger issue is that they may have destroyed the legal protections of the LLC by 'piercing the corporate veil'.

ETA More info on piercing the corporate veil:

http://www.nolo.com/legal-encyclopedia/personal-liability-pierci... 
NOLO said: There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners' alter ego) and that the owners are personally operating the business as if the corporation or LLC didn't exist. For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn't entitled to the limited liability that the corporate business structure would ordinarily provide.
 
NOLO said: Commingling assets. Small business owners may be more likely than their larger counterparts to commingle their personal assets with those of the corporation or LLC. For example, some small business owners divert corporate assets for their own personal use by writing a check from the company account to make a payment on a personal mortgage -- or by depositing a check made payable to the corporation into the owner's personal bank account. This is called "commingling of assets." To avoid trouble, the corporation should maintain its own bank account and the owner should never use the company account for personal use or deposit checks payable to the company in a personal account.

 

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I would add to stanolshefski's statement just to say that there could be other problems down the road - such as if you're trying to get financing, looking to get bought out, etc. Basically - don't do it. It's not really beneficial and can only create problems.

Also, the LLC is taxed as a partnership, so one owner can't just take distributions and pretend nothing really happened. Partnership taxation is incredibly complicated and doing something like this only serves to make everything even more complicated. Also, if they do get audited, even if they did everything correctly for tax purposes, it just doesn't look good, and I'd imagine the auditor will scrutinize transactions more.

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stanolshefski said:   
So long as they aren't claiming these personal expenses as business expenses...

That's an awfully big assumption.  I've seen this behavior a few times with some small business advisory work I've done, and in each case, that's EXACTLY what they were doing.   

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I heard an eerily similarly worded question tonight on the Dave Ramsey show.  His response was very similar to stanolshefski. 

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dcwilbur said:   
stanolshefski said:   
So long as they aren't claiming these personal expenses as business expenses...

That's an awfully big assumption.  I've seen this behavior a few times with some small business advisory work I've done, and in each case, that's EXACTLY what they were doing.   

  There was no assumption.  It's a qualifier to the statement that it's no big deal in terms of the IRS.  OP needs to determine how it applies to her situation.

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Glitch99 said:   
dcwilbur said:   
stanolshefski said:   
So long as they aren't claiming these personal expenses as business expenses...

That's an awfully big assumption.  I've seen this behavior a few times with some small business advisory work I've done, and in each case, that's EXACTLY what they were doing.   

  There was no assumption.  It's a qualifier to the statement that it's no big deal in terms of the IRS.  OP needs to determine how it applies to her situation.

  Since OP is reconciling the accounts, s/he should know exactly what's going on by now.

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honkinggoose said:   I heard an eerily similarly worded question tonight on the Dave Ramsey show.  His response was very similar to stanolshefski. 
 

  Dave Ramsey has a FWF handle: stanolshefsk!

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1) Bluth company?
2) Although no one is trying to hide it from you it seems- but if the spouse of one owner is spending all this money on her own personal expenses, wouldn't the other partner be getting shortchanged in the company profits? I know it's all family, just sayin...
3) I agree with above- I'm guessing she's trying to pretend like it's all a business expense- if that's the case then yes it's a big deal.

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KWJ said:   My husband and his father own an LLC. I've recently started working in the office so they can be out working the jobs. I reconcile accounts every month, and my mother in law is frequently using the business account for personal expenses; grocery shopping, home decor, lunches with friends etc. My question is, isn't this a big NO NO and aren't they just asking for an audit??
  Yes it is a big no no.  The MIL should be paid an income (1099, etc) so everything is on the up and up.  Of course then there are taxes involved so that's probably why MIL is doing what she is.

Source: several small business owners in my family.

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Xnarg1 said:   
KWJ said:   My husband and his father own an LLC. I've recently started working in the office so they can be out working the jobs. I reconcile accounts every month, and my mother in law is frequently using the business account for personal expenses; grocery shopping, home decor, lunches with friends etc. My question is, isn't this a big NO NO and aren't they just asking for an audit??
  Yes it is a big no no.  The MIL should be paid an income (1099, etc) so everything is on the up and up.  Of course then there are taxes involved so that's probably why MIL is doing what she is.

Source: several small business owners in my family.

  NO. The mother in law should absolutely not be paid a salary or disguised salary. If she's not doing anything for the business this may border on criminal.

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Surprising how many small businesses have various family members on the payroll....

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BD929 said:   Surprising how many small businesses have various family members on the payroll....
  Is it? Not really?

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