Re: Legality of drawing interest on funds put into personal account from business account
- From: "McGyver" <Greyprof@xxxxxxx>
- Date: Fri, 31 Mar 2006 22:09:48 GMT
"AymF" < fearful.asymmetry@xxxxxxxxx > wrote in message
news:1143826741.673857.245740@xxxxxxxxxxxxxxxxxxxxxxxxxxxx ...
If I own 100% of the shares of an S-corporation. All purchases for
goods are made on the spot as customers buy them, however, credit card
bills aren't due for payment until the end of the month. In the
meantime the amount customers have paid sits idle in the company
checking account until the credit card bill comes around. While waiting
for the credit card bill to come due I would like to be able to move
those funds into a savings account to draw interest, however, the
business savings account setup pays a paltry 1% interest. It would be
much better if for the 25 days that I have those funds available I
could shuttle them into a personal ING Direct savings account to draw a
higher interest rate.
Would doing so be legal?
Are there any forms or procedures needed for doing this temporary
transfer aside from reporting the personal gain on my taxes?
Your question is confused, so here are my assumptions about what you meant.
Correct me if this is not accurate.
1. The S-corp's customers pay the S-corp immediately as sales are
completed.
2. Some of the S-corp's purchases are done with credit cards and the bill
is not paid until the end of the month.
3. Therefore, some cash is temporarlly in the S-Corp's custody for part
of one month.
4. Would it be legal for the owner of the corporation to put that cash in
a personal savings account and keep the interest personally, paying the
principal back to the S-corp at the end of the month so the corporation can
pay the bills?
That would be embezzlement and breach of fiduciary duty if not handled
properly. One legal way to do it would be to have the corporation give you
a series of loans equal to the corporation's sales receipts, which you repay
to the corporation at the end of each month. You would use written
promissory notes and at least one board resolution. The corporation would
treat the interest that the corporation is giving up as compensation to you.
Withholding tax rules would apply, but that can be handled. I won't try to
deal with that complexity or with other possible methods of accomplishing
the objective, because the scheme would be unwise regardless of whether it
can be done legally.
The most important reason for doing business as a corporation rather than as
a sole proprietor is that the risks and liabilities of business can be borne
by the corporation and the owner will not be personally liable. The
stockholders of a corporation are not liabile for the debts of the
corporaton because the corporation is a seperate person legally. But this
only works if the corporation really is the separate entity, which really is
conducting business. If the stockholder is:
(a) running the business as if it were his personal property,
(b) comingling company funds and other assets with the owner's personal
assets,
(c) making all business decisions while the board of directors of the
company makes zero decisions,
(d) not conducting shareholder's meetings or board of directors meetings and
taking formal minutes thereof,
(e) leaving the business so under capitalized that it cannot sustain itself
without loans from the owner, and/or deferred compensation from it's
employee/shareholders,
the conclusion of a court would be that the corporation is nothing more than
an alter-ego of the owner, or a sham having no purpose other than isolation
of the owner from risks and debts. If that conclusion is reached, the
corporate veil has been pierced and the owner is personally liable for all
debts and liabilities. If the owner is not going to get isolation from
liabilities and risks, there is little point in bothering with a
corporation.
How does this issue get in front of a court, you ask? Some plaintiff sues
the company because the company's employee did something wrong that is not
insurable, like defamation, false advertising, restraint of trade,
discrimination in employment, etc., or did somehing wrong that is insurable
but the company doesn't have sufficient insurance, and the total net assets
of the corporation are not sufficent to satisfy plaintiff's claim. The
plaintiff also sues the owner of the business, either from the beginning or
later. The owner would file a motion saying in essence: "I should be
dropped from this lawsuit because all of those bad things were alledgedly
done by the corporation and the owner of a corporation is not responsible
for the liabilities of the corporation." The plaintff would file an
opposition to the motion, saying in essence: "This owner has been doing (a),
(b), (c), (d) and (e) and therefore, the corporation is a sham, an alter-ego
of the corporation, and the corporate seperateness should be ignored, and
this owner should be treated like a sole proprietor, and sole proprietors
are personally liable for the liabilities of the business." And the judge
would say, "By golly, you're right." And there goes your house, investment
fund, Swiss bank account, art collection and all other assets except assets
that are exempt assets in bankruptcy.
If there is some difficulty with the company having it's own high interest
depository, the business should solve that problem in some way other than
the one outlined above.
This answer must not be relied on as legal advice for the reasons posted
here:
http://mcgyverdisclaimer.blogspot.com
McGyver
.
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