Many small business owners use one bank account for everything: business expenses, personal purchases, and incoming payments, because it feels simpler. But once a business is formed as a corporation or LLC, that convenience can create serious legal risk.

 

Keeping business and personal finances separate is one of the most important steps in protecting personal assets and preserving limited liability.

 

Why Separation Matters

 

A corporation or LLC is a separate legal entity. That separation is what generally protects an owner’s personal assets, like a home or savings, from business debts and lawsuits. When funds are mixed, courts may decide the business isn’t truly separate and allow creditors to reach the owner personally.

 

This is known as “piercing the corporate veil.”

 

What Counts as Commingling

 

Commingling happens when personal and business finances are blurred, such as:

• Depositing business income into a personal account
• Paying personal expenses from the business account
• Using one credit card for both household and business spending
• Moving money back and forth without documentation

Even if the owner plans to “sort it out later,” the pattern itself can be used as evidence that the business is just an extension of the individual.

 

The Corporate Veil in California

 

California courts may disregard a corporation or LLC if they find:

• Commingling of funds
• Failure to follow basic corporate formalities
• Use of company funds for personal expenses
• Inadequate recordkeeping or capitalization
  
  

Commingling alone may not always be enough, but it is one of the strongest factors plaintiffs rely on when trying to establish personal liability.

 

Why Commingling Creates Legal Exposure

 

When personal and business funds flow through the same accounts, it becomes easier to argue the business is the owner’s “alter ego.” In litigation, bank statements and financial records are often reviewed closely to show lack of separation.

 

Even if a court ultimately rejects veil-piercing, defending against these claims can be expensive and disruptive.

 

Problems Beyond Lawsuits

 

Commingling can also cause:

• Tax complications and audit risk
• Poor financial visibility into the business’s performance
• Delays or red flags during financing, sales, or investor due diligence
• Credibility issues with banks and partners
  
  

Clean separation makes a business easier to manage, evaluate, and grow.

 

Practical Steps to Avoid Commingling

• Maintain dedicated business bank accounts and credit cards
• Pay owners properly through salary, distributions, or documented draws
• Record reimbursements and owner loans clearly and consistently
• Avoid informal transfers that look like personal spending
• Maintain corporate formalities such as minutes and resolutions

Legal and tax guidance can help tailor these practices to the business’s specific structure. If your business hasn’t reviewed its banking practices or governance recently, now is the time. Protecting personal assets starts with clear separation and consistent documentation.