Question: Is it theft for a shareholder of an incorporated business to pay personal expenses from the corporate bank account?

Written by: Andrew Gale - Orange County - Small Business Attorney

The client’s husband had formed a one shareholder small business corporation.

She wondered whether it was legal for her husband to pay the personal mortgage on his house, pay for the expenses of his vehicle such as loan payments and fuel utility hook up and the like. She also wondered whether or not the same rule would apply to her.

She also wondered whether or not it was a crime or against the law. She wondered whether or not the stockholder could make payments to himself such as company bonuses and the payment of personal expenses on the company business credit cards.

As you can see, she was worried about quite a number of things.

Answer: What do we consider corporate legitimate expenses in a California S Corporation?

It may theft for a shareholder of an incorporated business to pay personal expenses from the corporate bank account.

As with so many things having to do with corporate law, a helpful and proper answer would require input from lawyers who specialize in corporations, tax, and family law with an accountant thrown in for good measure. And, then, of course, it all depends on more facts.

Is it legal for a stockholder to have the business pay mortgage, vehicle payments, fuel, misc. expenses, utility hook-ups, bonuses, business credit cards as personal?

Per the IRS, business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in the trade or business.

A necessary expense is one that is helpful and appropriate to the trade or business. An expense does not have to be indispensable to be considered necessary.

Is this all legal?

Maybe. Each expense must be considered on its own merits. If the shareholder owner makes the personal expense from the entity, classifies the expense as a shareholder draw, and later pays the appropriate personal taxes, there most likely is not a problem.

If on the other hand, the expense is personal and hidden as a business expense, then the IRS (and ultimately the shareholder, will not be happy. If the wife has the knowledge and goes along with it, she could have a problem as well.

If you are not sure, send us an email and we can schedule a teleconference to review your situation.

Take a look at the S Corporation Bylaws

Many times, the subject of corporate expenses is covered in the corporate records as many shareholders of small business corporations require the limits be set out in writing before investing in a corporate start-up.