How A Business Credit Card Can Protect Your Corporate Veil

One of the easiest ways to have your corporate veil pierced is to commingle (mix) business and personal funds.

Activities such as these put your corporate veil at risk:

  • Writing checks for personal use (like paying your home mortgage) from your business checking account.
  • Charging business expenses on your personal credit card.

How a Business Credit Card Can Help

A business credit card is a card that you open in your company’s name. Once you form a limited liability company (LLC) for your business, you’ll start getting solicitations from dozens of credit card companies offering business credit cards.

Using Your Business Credit Card Correctly

You’ll want to run all of your business expenses through your business credit card. Don’t charge any personal items on this card. Keep everything entirely separate. It can be tempting to use your business credit card, particularly if it has a high limit, to purchase personal items. Especially if your personal finances are a little tight that month. However, in the end, you have to pay for everything anyway…and mixing money back and forth between yourself and your business only complicates record keeping and risks the asset protection that an LLC provides. At the end of the year, your credit card statements are a complete record of your business’s expenses. Some business credit cards even classify your expenses for you for tax purposes. You’ll have to double-check their results, because they classify by store type rather than item, but it gives you a good head start.

Caution: You’re Still Personally Liable On Your Business Credit Card

Having a credit card in your business’s name does not equal having business credit. Confused? What this means is, if you read the fine print on your business credit card agreement, what you’ll find 9 times out of 10, is that you are personally agreeing to be liable for all charges. In other words, you are personally liable for all your business’s credit card debt.

You will know you are personally guaranteeing a business credit card if you are asked on the application to give your Social Security number, date of birth, and home address and phone number. There would be no reason to ask for your SSN unless they were running your personal credit score and holding you liable for business purposes.

In technical terms, you are giving a personal guarantee of the business’s credit card. Doesn’t this go against the whole purpose of limited liability and not being responsible for company debts? Not at all. A business owner can always agree, by contract, to be personally responsible for business debts. In fact, if your business is new, that’s the only way banks will loan your company money. Otherwise, people could start up companies, borrow money, and never pay it back.

Is It Possible To Get A Business Credit Card Without a Personal Guarantee?

Yes, it is. If you have a long term relationship with your bank, and deposit a substantial amount of money in your business’s checking account, the bank will sometimes agree to issue a business credit card without a personal guarantee. Usually this requires a large deposit–on the order of tens of thousands to hundreds of thousands of dollars.

 

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