Asset Partitioning - Commingling of Funds

[Eric Williams]

Asset partitioning may be thought of as two types - affirmative and defensive.

In defensive asset partitioning, the personal assets of the firm owners are shielded from the creditors of the firm.

This is generally the type sought in real estate.

Commingling of funds involves basically mixing funds belonging to one party with those belonging to another. This can prevent concerned parties from distinguishing where the entity ends and where the owners begin.

If this line is either nonexistent or blurred to a significant extent, creditors may seek to establish there is a single entity for liability purposes. In essence, this would allow creditors to "pierce the veil" and seek recourse beyond business assets to owners' personal assets.

The creditors may be able to establish that the organization is merely an alter ego of the owners.

This may be demonstrated by making personal purchases with business assets.

Making personal purchases from business accounts such as education expenses or daycare.

Receiving deposits to owners SSN instead of the business EIN.

Lack of documentation such as 1099-NEC's for amounts paid to contractors by entity.

Thinly capitalized organizations.

Lack of formal proceedings for some types, such as minutes from meetings or officer selection if a corporation.

Personally guaranteeing otherwise nonrecourse loans.

Paying personal and business expenses from one account.

State laws are generally the relevant guidance in establishing the condition that allow for a disregarding of the division between business and personal assets, much of which can be gleaned from case law.

In essence, avoid the commingling of funds. If there is a commingling, establish evidence there is consistent and reasonable correction made within a reasonable amount of time.