In most cases, a business bank account cannot be garnished for a personal judgment, especially if the business is a separate legal entity like a corporation or an LLC with a separate tax ID number. These structures provide a legal distinction between your personal and business finances.
Your business can't pay off personal credit cards
This is not the debt of the companyas it's your personal debt. This applies even if you're a sole trader, freelancer or contractor. It's important to keep your company and personal finances completely separate.
Paying for personal expenses from your business account may expose you to potential legal and financial trouble. If your business is a corporation or limited liability corporation, your personal assets are protected from professional liabilities if your business is sued or fails.
If you're an owner of a corporation or LLC, you are a separate entity from the business, and the business isn't responsible for your personal debts. But while creditors generally can't take your business assets to pay your personal debts, they can take funds your business owes you.
Like most states, California doesn't permit personal creditors of an LLC member to have a court order that the LLC be dissolved and its assets sold to pay off the creditor. So, fortunately for you and your fellow LLC owners, you don't need to worry about your company involuntarily closing due to your personal debt.
This separation provides what is called limited liability protection. As a general rule, if the LLC can't pay its debts, the LLC's creditors can go after the LLC's bank account and other assets.
The Short Answer: Yes. Share: The IRS probably already knows about many of your financial accounts, and the IRS can get information on how much is there. But, in reality, the IRS rarely digs deeper into your bank and financial accounts unless you're being audited or the IRS is collecting back taxes from you.
To put it simply, when you mix your business and personal finances, you're essentially treating your business as a personal piggy bank. 🐷 And while it's not technically against the law to make a personal purchase from your business account, it can lead to major issues with taxes, bookkeeping, and compliance.
Transferring funds from a single-member LLC business account to your personal account is generally treated as an "owner's draw" and is not taxable income since the LLC's income is already reported on your personal tax return. However, the transfer itself doesn't trigger a tax event.
An LLC is responsible for its own debts, and it could face losing its assets if a business creditor takes legal action. In the structure of an LLC, it is the individual members, who are the owners of the LLC, who benefit from limited liability protection when dealing with business creditors.
If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you're allowed to deduct is the amount you paid to acquire it. CAUTION! You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income.
At that time, some find that their personal credit affects their ability to qualify for a business loan. Their loan size they need to scale their business may also be impacted. Entrepreneurs looking to start a business may have to delay their business launch to clean or strengthening their personal credit.
Bank accounts solely for government benefits
Federal law ensures that creditors cannot touch certain federal benefits, such as Social Security funds and veterans' benefits. If you're receiving these benefits, they would be exempt from garnishment.
What happens if an LLC defaults on a loan? If an LLC defaults on a loan, a lender will typically try to work with you, setting up a plan to pay off the loan. If this doesn't work, you'll go into default. If you signed a personal guarantee or provide collateral, your lender has the right to seize assets.
The concept of the “corporate veil” separates personal and business assets. Using personal money to cover business debts can blur this line and expose you to legal and tax implications. This move can put your assets, such as your home and savings, at risk.
However, to maintain the protection of an LLC, it is important to keep your business and personal finances separate. For example, the business should have a separate bank account to receive client payments. Owners should not pay personal expenses from the business accounts.
The U.S. Chamber of Commerce recommends businesses keep at least three to six months' worth of cash on hand. “Cash 'on hand' refers to any accessible money, funds in bank accounts, or liquid assets that could be accessed within less than 90 days,” it says.
However, when you use your business bank account to cover personal expenses, you run the risk of losing that protection and being held personally liable for any of your business' liabilities. Even under other business structures that do not protect your personal assets, you may still run a risk in case of an IRS audit.
What Accounts Can the IRS Not Touch? Any bank accounts that are under the taxpayer's name can be levied by the IRS. This includes institutional accounts, corporate and business accounts, and individual accounts. Accounts that are not under the taxpayer's name cannot be used by the IRS in a levy.
Unreported income
The IRS receives copies of your W-2s and 1099s, and their systems automatically compare this data to the amounts you report on your tax return. A discrepancy, such as a 1099 that isn't reported on your return, could trigger further review.
You can deposit up to $10,000 cash before reporting it to the IRS. Lump sum or incremental deposits of more than $10,000 must be reported. Banks must report cash deposits of more than $10,000. Banks may also choose to report suspicious transactions like frequent large cash deposits.
So a sole proprietor is responsible for the business's debts, and vice versa. If you've got sizeable personal debts, what happens to your business will depend on how you deal with your debt. If you decide to file for bankruptcy, it depends on which kind of bankruptcy you choose.
Generally, courts desire to uphold the protections provided by the LLC business structure. Thus, they will typically pierce the corporate veil and hold individual owners personally liable only where there is wrongful or fraudulent conduct or where there is no true separation between the LLC and its owners.
An LLC's money or property cannot be taken by creditors of an LLC's owner to satisfy personal debts against the owner.