How to tell my boss no if she makes unethical, maybe illegal, requests?
November 30, 2016 11:26 PM Subscribe
I'm the administrator at a small business (s-corp, 100% owned by own person) and I am responsible for everything financial (paying bills, invoicing, payroll, anything to do with money). The owner sometimes asks for money from the business account to cover personal expenses. I am struggling with how to put a stop to this for good.
The business has been operating for a year and a half and no one involved had any prior experience running a business. There is no accountant or even a lawyer, I do everything. We have discussed many times the need to keep business and personal expenses completely separate and the legal and financial ramifications of not doing so. She doesn't transfer money between the accounts so has to come to me to do that.
For the first few months, the owner was downright scared to even look at the business account and didn't make these outlandish requests. Then she started asking to "borrow" money that I could then take back from her pay. Then she started asking me to delay taking the money back from her pay. Now she doesn't even offer to pay anything back. The requests range from emergencies (legal bills for her family, dental work in excess of her insurance) to extravagances (big screen tv, $1000 for a cruise she then didn't go on but couldn't get refunded).
It's clear to me all the many reasons this is wrong and must stop. I'd rather her salary be raised even more so she can pay for these things herself, but tripling her salary in the last few months hasn't stopped the requests. They've gotten worse. I feel completely responsible because I give her what she asks for if it's available even though I know that not only is it wrong, but the money is earmarked for future bills. I am terrible at saying no when people ask me for money, and I keep thinking it's her business, her money, and if it fails it's on her. But it's bothering me and stressing me out because I do care about the business and this is hurting it.
I've never been in this position before and I don't know what to say, since explaining that it's illegal hasn't gotten through at all.
The business has been operating for a year and a half and no one involved had any prior experience running a business. There is no accountant or even a lawyer, I do everything. We have discussed many times the need to keep business and personal expenses completely separate and the legal and financial ramifications of not doing so. She doesn't transfer money between the accounts so has to come to me to do that.
For the first few months, the owner was downright scared to even look at the business account and didn't make these outlandish requests. Then she started asking to "borrow" money that I could then take back from her pay. Then she started asking me to delay taking the money back from her pay. Now she doesn't even offer to pay anything back. The requests range from emergencies (legal bills for her family, dental work in excess of her insurance) to extravagances (big screen tv, $1000 for a cruise she then didn't go on but couldn't get refunded).
It's clear to me all the many reasons this is wrong and must stop. I'd rather her salary be raised even more so she can pay for these things herself, but tripling her salary in the last few months hasn't stopped the requests. They've gotten worse. I feel completely responsible because I give her what she asks for if it's available even though I know that not only is it wrong, but the money is earmarked for future bills. I am terrible at saying no when people ask me for money, and I keep thinking it's her business, her money, and if it fails it's on her. But it's bothering me and stressing me out because I do care about the business and this is hurting it.
I've never been in this position before and I don't know what to say, since explaining that it's illegal hasn't gotten through at all.
Maybe hire a Chartered Accountant for a couple hours a week or whatever the equivalent is in your jurisdiction to play the heavy. Considering you are doing everything at the moment the company should have someone doing a periodic audit anyways to make sure you aren't stealing the company blind. Sometimes having someone at an arms length can make limits seem reasonable rather than petty and allow you appeal to authority when the owner makes these demands.
posted by Mitheral at 11:44 PM on November 30, 2016 [4 favorites]
posted by Mitheral at 11:44 PM on November 30, 2016 [4 favorites]
You might want to ask this over at Ask A Manager--this is the sort of letter she gets all the time, and she usually gives good advice.
posted by hurdy gurdy girl at 11:52 PM on November 30, 2016 [7 favorites]
posted by hurdy gurdy girl at 11:52 PM on November 30, 2016 [7 favorites]
IANAA. It's not at all clear to me why this would be wrong or need to stop. Since this is an s-corp, the owner can just take an owner's draw, and that's appropriate, usual, ethical, and legal, as far as I understand these things?
It's (most likely) illegal because the owner is effectively treating her personal expenses as business expenses of the S-corp, thereby evading taxes. Payments for personal expenses are wages. Say the revenues of the corporation are $200 and it gives her $100 to cover her personal expenses, its only expense. She pays at her effective individual tax rate for the $100 in wages and then also for the $100 in passed-through corporate income ($200-$100). Say at 20%: $40.
Instead, in the current scenario, the corporation will deduct these "ordinary and necessary business expenses" from its revenues in calculating its taxable income that will pass through to the owner. Corporate revenues are $200, its income $100 ($200-the $100 expense). She pays at her effective individual tax rate for the $100 in corporate income. At 20%, that's $20.
Also, the IRS thinks there are some pretty serious restrictions on how much can be taken as a distribution as compared to wages in that year. If you don't understand the issues there, for your own good, stay far away from closely-held corporations.
posted by praemunire at 12:44 AM on December 1, 2016 [9 favorites]
It's (most likely) illegal because the owner is effectively treating her personal expenses as business expenses of the S-corp, thereby evading taxes. Payments for personal expenses are wages. Say the revenues of the corporation are $200 and it gives her $100 to cover her personal expenses, its only expense. She pays at her effective individual tax rate for the $100 in wages and then also for the $100 in passed-through corporate income ($200-$100). Say at 20%: $40.
Instead, in the current scenario, the corporation will deduct these "ordinary and necessary business expenses" from its revenues in calculating its taxable income that will pass through to the owner. Corporate revenues are $200, its income $100 ($200-the $100 expense). She pays at her effective individual tax rate for the $100 in corporate income. At 20%, that's $20.
Also, the IRS thinks there are some pretty serious restrictions on how much can be taken as a distribution as compared to wages in that year. If you don't understand the issues there, for your own good, stay far away from closely-held corporations.
posted by praemunire at 12:44 AM on December 1, 2016 [9 favorites]
In the UK, the owner can take out money as dividends, but it needs to be properly documented and of course there are tax implications (i.e. - dividends are income, you need to pay tax on them). The owner can take out a 'director loan' but if it gets too large it will raise eyebrows, and will eventually need to be paid back.
I suspect it works in a not dissimilar way in the US. As well as ethics, this will come back to bite the owner sooner or later, in the form of an investigation or a very large tax bill.
For her own protection, she needs an accountant to help.
posted by plep at 12:55 AM on December 1, 2016 [2 favorites]
I suspect it works in a not dissimilar way in the US. As well as ethics, this will come back to bite the owner sooner or later, in the form of an investigation or a very large tax bill.
For her own protection, she needs an accountant to help.
posted by plep at 12:55 AM on December 1, 2016 [2 favorites]
Combining Mitheral and praemunire's answers a bit, maybe you could play this by bringing in an expert to deal with the tax implications, because this stuff needs to be reported properly depending on whether these payments are wages, profits, or loans (and whether they are loans that are paid back or loans that aren't, even an interest free loan might be considered taxable as wages), and you need someone to set up the systems to record everything legally. That person, if they're qualified, is then in a great position to further advise on what is and isn't a good idea and the consequences of various courses of action (which extend beyond taxes; my understanding is that it becomes increasingly harder to use a corporation to shield liability the more you start using the company as your personal piggy bank). And by describing it as tax advice, you're simply doing a good job as an administrator: hiring an expert to ensure the business knows how to report everything properly, and not confronting the owner about anything yourself.
posted by zachlipton at 1:09 AM on December 1, 2016
posted by zachlipton at 1:09 AM on December 1, 2016
Seconding praemunire and plep: the problem isn't that she's stealing from the company, since she's the sole owner; the problem is tax evasion --- and she's making you her accomplice in that. You need to have an outside accountant go over the books to both be sure all the company's proper taxes ARE paid and to cover your own ass. And if she won't agree to that, get the heck out of Dodge and find another job!
posted by easily confused at 1:17 AM on December 1, 2016 [6 favorites]
posted by easily confused at 1:17 AM on December 1, 2016 [6 favorites]
I don't know how an s-corp works - I'm not in the USA - but I have my own business and I pay for virtually all my expenses from the business account. This is totally fine because they're allocated to what's called "drawings" which is the money an owner takes from a sole trader or partnership business. It accounting terms it's a type of equity account. It's not counted as a business expense so there are no tax issues. This seems to be more or less in line with what solitary dancer is saying about the s-corp.
One possibility might be to just allocate all the money she "borrows" from the business to her wages account without discussing it with her. You're doing the right thing by recording it accurately and if she complains you could try to explain that you're simply doing it according to standard accounting practice.
Most likely though and regardless of how you manage the accounting, this is going to come to a head at some point and you are going to have to either do something you know to be wrong or refuse to do that thing. I don't see much of a way around that. Even before this happens, you may need to say no because it would leave you with insufficient funds to meet your obligations to creditors. You may also need to inform her before that happens because you can see it coming.
Ultimately I think it's more of an assertiveness-with-your-boss issue than anything else and, yeah, these things can be very difficult. You may lose your job if she orders you to do something you aren't prepared to do.
She's being an absolute douche potato, not to mention an appallingly bad employer, in doing this to you. Consider too that anyone who would do what she's already done will probably be quite happy to blame you if the IRS comes after the business too. If I were in your position and I had a reasonable prospect of getting another job, I think I would be looking for one.
posted by mewsic at 2:23 AM on December 1, 2016 [4 favorites]
One possibility might be to just allocate all the money she "borrows" from the business to her wages account without discussing it with her. You're doing the right thing by recording it accurately and if she complains you could try to explain that you're simply doing it according to standard accounting practice.
Most likely though and regardless of how you manage the accounting, this is going to come to a head at some point and you are going to have to either do something you know to be wrong or refuse to do that thing. I don't see much of a way around that. Even before this happens, you may need to say no because it would leave you with insufficient funds to meet your obligations to creditors. You may also need to inform her before that happens because you can see it coming.
Ultimately I think it's more of an assertiveness-with-your-boss issue than anything else and, yeah, these things can be very difficult. You may lose your job if she orders you to do something you aren't prepared to do.
She's being an absolute douche potato, not to mention an appallingly bad employer, in doing this to you. Consider too that anyone who would do what she's already done will probably be quite happy to blame you if the IRS comes after the business too. If I were in your position and I had a reasonable prospect of getting another job, I think I would be looking for one.
posted by mewsic at 2:23 AM on December 1, 2016 [4 favorites]
Office manager of an S-corp here. When our partners take out money from the company, it's coded into the accounting software as a "partner draw". Do you have that expense account set up? This would let the accountant know how to process the taxes due at the end of the year, assuming you/ the owners has an accountant to take care of the taxes?
posted by sarajane at 4:19 AM on December 1, 2016 [9 favorites]
posted by sarajane at 4:19 AM on December 1, 2016 [9 favorites]
I've never been in this position before and I don't know what to say, since explaining that it's illegal hasn't gotten through at all.
If you've told her it's illegal and she still wants you to do it, then the you don't have much choice except to refuse, as hard as that is. In The Gentle Art of Verbal Self-Defense, Suzette Haden Elgin talks about the "broken record" technique. That's probably the one I'd go with for this situation.
"Hey, anonymous, I need some money from the business account for another personal expense."
"I'm sorry, I can't do that. It's illegal."
"But you did it before!"
"I did, and that was a mistake. It's illegal."
"I don't see why this is a big deal."
"It's illegal."
"Just one more time. I really need it."
"Sorry, it's illegal."
"If you won't do it, I'll have to find someone who will."
"Sorry, it's illegal."
If you've told her that it's illegal but then did it anyway, you are sending the message that you'll help her do illegal things. The only way to undo that message is to stop doing it. I understand this is hard, but you know it has to stop, and there's no way to stop except to stop. The light at the end of the tunnel is once you make it clear you won't do this anymore, that stress will end. Probably she'll stop asking you and figure out how to live on her salary. Maybe she'll end your employment. I don't think that's likely, since "termination for failure to help me continue evading tax law" is the sort of action liable to really blow up in her face, but you need to be willing to face that possibility. The point remains. It's illegal, and you won't do it anymore. Tell yourself that, then tell her.
posted by Pater Aletheias at 4:30 AM on December 1, 2016 [5 favorites]
If you've told her it's illegal and she still wants you to do it, then the you don't have much choice except to refuse, as hard as that is. In The Gentle Art of Verbal Self-Defense, Suzette Haden Elgin talks about the "broken record" technique. That's probably the one I'd go with for this situation.
"Hey, anonymous, I need some money from the business account for another personal expense."
"I'm sorry, I can't do that. It's illegal."
"But you did it before!"
"I did, and that was a mistake. It's illegal."
"I don't see why this is a big deal."
"It's illegal."
"Just one more time. I really need it."
"Sorry, it's illegal."
"If you won't do it, I'll have to find someone who will."
"Sorry, it's illegal."
If you've told her that it's illegal but then did it anyway, you are sending the message that you'll help her do illegal things. The only way to undo that message is to stop doing it. I understand this is hard, but you know it has to stop, and there's no way to stop except to stop. The light at the end of the tunnel is once you make it clear you won't do this anymore, that stress will end. Probably she'll stop asking you and figure out how to live on her salary. Maybe she'll end your employment. I don't think that's likely, since "termination for failure to help me continue evading tax law" is the sort of action liable to really blow up in her face, but you need to be willing to face that possibility. The point remains. It's illegal, and you won't do it anymore. Tell yourself that, then tell her.
posted by Pater Aletheias at 4:30 AM on December 1, 2016 [5 favorites]
For the bookkeeping, an equity account (for draws or distributions) should cover you and be clear to whoever prepares her taxes. In the U.S. at least, there may also be tax implications to the below-market rate loans (for those, if that's what the we're) a CPA can run through with you.
posted by glibhamdreck at 5:00 AM on December 1, 2016 [2 favorites]
posted by glibhamdreck at 5:00 AM on December 1, 2016 [2 favorites]
Money drawn from an S-corp for non-business purposes is accounted for as a "distribution of net income" and, as long as it is handled that way, is completely legal. The nature of an S-corp is that any revenue that was not expended by the business (for salaries, production materials, advertising, and other legitimate business expenses) flows through to the owner's personal taxes. When she takes a distribution of net income, there are no tax implications versus leaving the money in the company: she would owe income tax on that money whether it was in the business account, in her personal bank account, or already spent.
As noted upthread, if her salary is set very low and she takes as a distribution what would otherwise be salary, the IRS may look askance but it will not be your ass on the line since you don't make the decisions regarding salary. Now if she is shortchanging the company by drawing too much money out of it versus using it to maintain and grow the business, she may be jeopardizing its longevity (and, with it, the security of your job) but that, too, is not your responsibility.
IANAA, but have owned (and kept the books for) an S-corp for over 20 years, working closely with my own accountant.
posted by DrGail at 5:50 AM on December 1, 2016 [4 favorites]
As noted upthread, if her salary is set very low and she takes as a distribution what would otherwise be salary, the IRS may look askance but it will not be your ass on the line since you don't make the decisions regarding salary. Now if she is shortchanging the company by drawing too much money out of it versus using it to maintain and grow the business, she may be jeopardizing its longevity (and, with it, the security of your job) but that, too, is not your responsibility.
IANAA, but have owned (and kept the books for) an S-corp for over 20 years, working closely with my own accountant.
posted by DrGail at 5:50 AM on December 1, 2016 [4 favorites]
There is nothing at all illegal about a 100% corporate owner paying personal expenses from the corporate kitty. Full stop. What is illegal, and what small business owners are CONSTANTLY audited on and penalized for, is treating the personal expenses AS business expenses for deduction / inclusion purposes. (Basically, a business expense is by default 100% deductible, and a personal expense is by default 100% non-deductible for a pass-through and taxable income of the owner for a non-pass-through.)
You shouldn't assume that your boss is a tax dodger, but to protect you and her both you need to make sure that non-reimbursed personal expenses are clearly recorded as such and that your boss's tax accountant receives accurate records from you, as in, you directly send the QuickBooks (or whatever) output to the tax accountant, so there is a very clear paper trail that you did the right thing all along.
posted by MattD at 6:35 AM on December 1, 2016 [10 favorites]
You shouldn't assume that your boss is a tax dodger, but to protect you and her both you need to make sure that non-reimbursed personal expenses are clearly recorded as such and that your boss's tax accountant receives accurate records from you, as in, you directly send the QuickBooks (or whatever) output to the tax accountant, so there is a very clear paper trail that you did the right thing all along.
posted by MattD at 6:35 AM on December 1, 2016 [10 favorites]
I think this is more naivety than dishonesty, but this will come back to bite her in a big way, and her intransigence/apparent unwillingness to listen is a worry. This may not be the only example.
I think you should consider looking for another employer. When the proverbial sugar hits the fan, you don't want a part of that.
posted by plep at 7:10 AM on December 1, 2016 [1 favorite]
I think you should consider looking for another employer. When the proverbial sugar hits the fan, you don't want a part of that.
posted by plep at 7:10 AM on December 1, 2016 [1 favorite]
I am a small business organized as an LLC that files taxes as an S Corp. I have very good accountants that set this up for me.
How it works for me is I have a set monthly salary that is taxed as a salary and pays social security, etc.
The rest of the business income, effectively anything in my business accounts at any time, can be taken by me as a draw. Any amount, any day. I probably could even wipe out the line of credit if I wanted.
For me, all of the business money/assets are mine, and have access to all of it at any time. The only difference between my salary and the rest of the money is that my salary is paid out monthly (but I could take a lump sum, or daily, or whatever) and the draws are discretionary. Salary is taxed differently than a draw.
The draws, for me, are set at a lower tax rate. So we try to keep that high-tax salary low but realistic for my position.
Your boss may also have a low salary to protect from taxes and rely on the draws as bonuses, basically. This is how I pay myself, completely legally and 100% disclosed to the IRS.
You should probably talk to the accountant/lawyer that set up the business structure and deals with the taxes. You don't want to do anything that messes this system up and I don't think you know clearly how the business is organized.
posted by littlewater at 7:16 AM on December 1, 2016 [4 favorites]
How it works for me is I have a set monthly salary that is taxed as a salary and pays social security, etc.
The rest of the business income, effectively anything in my business accounts at any time, can be taken by me as a draw. Any amount, any day. I probably could even wipe out the line of credit if I wanted.
For me, all of the business money/assets are mine, and have access to all of it at any time. The only difference between my salary and the rest of the money is that my salary is paid out monthly (but I could take a lump sum, or daily, or whatever) and the draws are discretionary. Salary is taxed differently than a draw.
The draws, for me, are set at a lower tax rate. So we try to keep that high-tax salary low but realistic for my position.
Your boss may also have a low salary to protect from taxes and rely on the draws as bonuses, basically. This is how I pay myself, completely legally and 100% disclosed to the IRS.
You should probably talk to the accountant/lawyer that set up the business structure and deals with the taxes. You don't want to do anything that messes this system up and I don't think you know clearly how the business is organized.
posted by littlewater at 7:16 AM on December 1, 2016 [4 favorites]
In addition to all the above advice, I would suggest you DOCUMENT all of your objections to this behavior. If she asks you in person, send a follow up email saying something along the lines of "As per our discussion earlier today, I've transfered $x to your personal account. Please note that I believe that this transfer goes against standard accounting procedures and it is my strong recommendation that you consult a tax accountant about this matter." BCC yourself at a personal email account. Also, keep a written record of each time she requests that you do something you think is unethical.
posted by mcduff at 7:20 AM on December 1, 2016
posted by mcduff at 7:20 AM on December 1, 2016
When owner wants money, explain that it will be treated as income and be taxable.
posted by theora55 at 7:38 AM on December 1, 2016 [1 favorite]
posted by theora55 at 7:38 AM on December 1, 2016 [1 favorite]
The high dividend (or draw)/low wage income littlewater describes is the same model as how many one-person limited companies work in the UK, but note that while the tax on dividends is generally lower, there is still tax to pay. This goes to the heart of the problem.
(UK filter) - tax on dividends.
'Borrowing' money is a director loan. It needs to be paid back, potentially with interest. More.
One guy (an Oracle DBA) I worked with simply took £10,000 or so out of his company whenever he felt like it. He said it was his money to do with as he pleased. I’m not even sure that he had an accountant. He was a disaster waiting to happen! - this unfortunately sounds very similar to your boss.
Obviously - two countries, two different tax regimes - but close enough I think for the pitfalls to be very real.
Anyone running a company needs an accountant to keep them honest, I believe.
posted by plep at 7:39 AM on December 1, 2016
(UK filter) - tax on dividends.
'Borrowing' money is a director loan. It needs to be paid back, potentially with interest. More.
One guy (an Oracle DBA) I worked with simply took £10,000 or so out of his company whenever he felt like it. He said it was his money to do with as he pleased. I’m not even sure that he had an accountant. He was a disaster waiting to happen! - this unfortunately sounds very similar to your boss.
Obviously - two countries, two different tax regimes - but close enough I think for the pitfalls to be very real.
Anyone running a company needs an accountant to keep them honest, I believe.
posted by plep at 7:39 AM on December 1, 2016
I've never been in this position before and I don't know what to say, since explaining that it's illegal hasn't gotten through at all.
"Illegal" is a funny term in these kinds of situations, it's so vague and squishy as to almost be meaningless, and but your question reads as though believe that it has the force of a cudgel. So many questions: why is it illegal? who is the one taking the illegal action? what are the consequences?
It seems like, from reading the other answers here, that there probably a "legal" way to get your boss what she wants. You might not even need to get your boss on board with the plan, but you do need to figure out how you are accounting for these disbursements so that come tax time, they are dealt with appropriately. If she has a problem with you documenting things accurately, then you need a new job.
If your boss is spending through money that is earmarked for future expenses, make that clear to her, but give her the money. When suppliers start hounding the company for unpaid bills, pass the nastygrams on to her. Start looking for a new job well before the first time the company fails to make payroll.
But it's bothering me and stressing me out because I do care about the business and this is hurting it.
Your boss is very lucky to have someone like you, who cares about her business, running things. But when it comes down to it, it is her business, and the business doesn't care about you (because it can't... it may be a "person" but it's not a human). I've mentioned a couple of things above that should trigger you to start job hunting, but to be honest, I'm not sure that this business deserves you. Maybe you should be looking for a better fit now, because nothing that you've said leads me to believe that the writing isn't already on the wall.
posted by sparklemotion at 8:16 AM on December 1, 2016 [1 favorite]
"Illegal" is a funny term in these kinds of situations, it's so vague and squishy as to almost be meaningless, and but your question reads as though believe that it has the force of a cudgel. So many questions: why is it illegal? who is the one taking the illegal action? what are the consequences?
It seems like, from reading the other answers here, that there probably a "legal" way to get your boss what she wants. You might not even need to get your boss on board with the plan, but you do need to figure out how you are accounting for these disbursements so that come tax time, they are dealt with appropriately. If she has a problem with you documenting things accurately, then you need a new job.
If your boss is spending through money that is earmarked for future expenses, make that clear to her, but give her the money. When suppliers start hounding the company for unpaid bills, pass the nastygrams on to her. Start looking for a new job well before the first time the company fails to make payroll.
But it's bothering me and stressing me out because I do care about the business and this is hurting it.
Your boss is very lucky to have someone like you, who cares about her business, running things. But when it comes down to it, it is her business, and the business doesn't care about you (because it can't... it may be a "person" but it's not a human). I've mentioned a couple of things above that should trigger you to start job hunting, but to be honest, I'm not sure that this business deserves you. Maybe you should be looking for a better fit now, because nothing that you've said leads me to believe that the writing isn't already on the wall.
posted by sparklemotion at 8:16 AM on December 1, 2016 [1 favorite]
Seconding MattD. The 100% owner can take money out of the company at will - it is not illegal or wrong, it's her company, she is entitled to any profits, etc.* The legal issues are around how those fund transfers are treated for tax purposes. So long as you provide an accurate record of what funds were taken to the tax preparer, you're doing the right thing. The owner will have to pay taxes on those funds in an appropriate way or break the tax laws, but that's on her to figure out.
*The one exception I can think of is if you have reason to believe the company is insolvent - i.e., cannot pay its debts. In that case, the creditors of the company could sue the owner to get the money she took.
posted by Mid at 8:49 AM on December 1, 2016 [1 favorite]
*The one exception I can think of is if you have reason to believe the company is insolvent - i.e., cannot pay its debts. In that case, the creditors of the company could sue the owner to get the money she took.
posted by Mid at 8:49 AM on December 1, 2016 [1 favorite]
Small business owner here also LLC who files as an S-Corp.
re-iterating this is not illegal unless she's treating these expenses as business expenses and then its a tax situation for the owner to deal with. Even then some expenses can be hazy.
It's a poor business practice and can have real implications come tax time if she's suddenly overwhelmed by a huge tax bill and doesn't have the money to pay for it. This is where business owners get in trouble all the time and it makes for dangerous waters.
For your own personal piece of mind I'd run the P&L on the business every quarter and make sure you have at least 40% of earnings (profits - not revenues) in the account to cover the end of year tax bill - plus enough to fund a operations. She should be paying quarterly taxes but for new and growing businesses this amount can be well under what will need to be paid at the end of the year.
Also make sure that any disbursements are classified as such in your accounting software even just a separate excel or google sheet.
On the other side most small business owners don't take all the profit out of a business at the end of the year in order to save money for ongoing operations so in essence the company bank account becomes something of a personal savings account and as long as the cash flow is fine taking money out for expenses is fine.
posted by bitdamaged at 9:05 AM on December 1, 2016 [2 favorites]
re-iterating this is not illegal unless she's treating these expenses as business expenses and then its a tax situation for the owner to deal with. Even then some expenses can be hazy.
It's a poor business practice and can have real implications come tax time if she's suddenly overwhelmed by a huge tax bill and doesn't have the money to pay for it. This is where business owners get in trouble all the time and it makes for dangerous waters.
For your own personal piece of mind I'd run the P&L on the business every quarter and make sure you have at least 40% of earnings (profits - not revenues) in the account to cover the end of year tax bill - plus enough to fund a operations. She should be paying quarterly taxes but for new and growing businesses this amount can be well under what will need to be paid at the end of the year.
Also make sure that any disbursements are classified as such in your accounting software even just a separate excel or google sheet.
On the other side most small business owners don't take all the profit out of a business at the end of the year in order to save money for ongoing operations so in essence the company bank account becomes something of a personal savings account and as long as the cash flow is fine taking money out for expenses is fine.
posted by bitdamaged at 9:05 AM on December 1, 2016 [2 favorites]
The legal issues are around how those fund transfers are treated for tax purposes. So long as you provide an accurate record of what funds were taken to the tax preparer, you're doing the right thing.
I'm not a corporate tax expert, but I think some of these issues may not be fixable ex post without penalty. If the owner is getting wages in the form of payment for personal expenses, I believe she (and the S-corp) need to be paying payroll taxes at the time of payment. If the owner is taking loans from the corporation, she needs to be paying market-rate interest from the beginning or she's again likely to find herself treated as having taken that money as wages or a gift; revert to step one problem.
If someone has set up her books to properly account for draws but she's just randomly drawing money to cover whatever she feels like, she's just asking to get looked at for the draws vs. salary problem others have mentioned. Honestly, it doesn't sound like, as some have suggested, owner has a deep understanding of her accounting and it's OP who's not getting it.
My understanding is that the IRS has in the past chosen to go after surprisingly small businesses for surprisingly small amounts of money over these issues. (Although who knows if there will be any tax law enforcement at all come next year...) I don't think that right now OP is doing anything that exposes her to legal liability, as long as she's keeping accurate records; however, the odds that the owner's (likely) doing so will lead to the owner's pressuring her to fudge those records once she works out what a mess she's put herself in are extremely high, and that's how you end up in real trouble.
posted by praemunire at 9:21 AM on December 1, 2016 [1 favorite]
I'm not a corporate tax expert, but I think some of these issues may not be fixable ex post without penalty. If the owner is getting wages in the form of payment for personal expenses, I believe she (and the S-corp) need to be paying payroll taxes at the time of payment. If the owner is taking loans from the corporation, she needs to be paying market-rate interest from the beginning or she's again likely to find herself treated as having taken that money as wages or a gift; revert to step one problem.
If someone has set up her books to properly account for draws but she's just randomly drawing money to cover whatever she feels like, she's just asking to get looked at for the draws vs. salary problem others have mentioned. Honestly, it doesn't sound like, as some have suggested, owner has a deep understanding of her accounting and it's OP who's not getting it.
My understanding is that the IRS has in the past chosen to go after surprisingly small businesses for surprisingly small amounts of money over these issues. (Although who knows if there will be any tax law enforcement at all come next year...) I don't think that right now OP is doing anything that exposes her to legal liability, as long as she's keeping accurate records; however, the odds that the owner's (likely) doing so will lead to the owner's pressuring her to fudge those records once she works out what a mess she's put herself in are extremely high, and that's how you end up in real trouble.
posted by praemunire at 9:21 AM on December 1, 2016 [1 favorite]
To be more clear about this, an owner's draw is fine but charging personal expenses to the business is not fine.
Example:
Owner wants to buy a $25,000 ruby ring, unrelated to her Bread Oven Business.
Owner may have her accountant cut her a check for $25,000 at any time as a draw. Taxes are paid as other business income disbursements in the owner's personal taxes. The draw is just reflected as a profit disbursement on the taxes and is taxed as all other corporate taxes.
Owner may not have the accountant cut a check to Ruby Rings for $25,000 since it is not business equipment/a business expense.
If it were business equipment (a bread oven) the cost could be deducted from profits to save on corporate tax. The ruby ring is not a business expense so it should not be purchased by the business. Of course all bread ovens are purchased with business account funds, and are written off as equipment expense vs profits on taxes.
A ruby ring can be purchased by the owner after she takes her draw check, deposits that in her personal account, and then writes a personal check to Ruby Rings.
And this is why I'm always nervous when I use a few of my business-purchased Post-It's for personal use.
This business REALLY REALLY needs professional advice.
What are you doing about unemployment insurance and worker comp? These things could tie in with your corp structure and tax situation.
posted by littlewater at 10:00 AM on December 1, 2016 [2 favorites]
Example:
Owner wants to buy a $25,000 ruby ring, unrelated to her Bread Oven Business.
Owner may have her accountant cut her a check for $25,000 at any time as a draw. Taxes are paid as other business income disbursements in the owner's personal taxes. The draw is just reflected as a profit disbursement on the taxes and is taxed as all other corporate taxes.
Owner may not have the accountant cut a check to Ruby Rings for $25,000 since it is not business equipment/a business expense.
If it were business equipment (a bread oven) the cost could be deducted from profits to save on corporate tax. The ruby ring is not a business expense so it should not be purchased by the business. Of course all bread ovens are purchased with business account funds, and are written off as equipment expense vs profits on taxes.
A ruby ring can be purchased by the owner after she takes her draw check, deposits that in her personal account, and then writes a personal check to Ruby Rings.
And this is why I'm always nervous when I use a few of my business-purchased Post-It's for personal use.
This business REALLY REALLY needs professional advice.
What are you doing about unemployment insurance and worker comp? These things could tie in with your corp structure and tax situation.
posted by littlewater at 10:00 AM on December 1, 2016 [2 favorites]
I don't want to belabor this, but if an owner has the right to take a draw at will (which I think we all agree upon) then the owner can take out money at will and call it a draw. It doesn't matter if she says she wants the money to buy a TV or a ring - it's just a draw. If the owner has the company write a check directly to the jeweler and then takes the ring for herself, she's taken a draw for the value of the ring (she's taken a company asset - the ring - as a draw). The main point is: it's not illegal for the owner of a company to take money out of the company or have the company buy stuff for her; the legal issue is properly accounting for those expenditures and paying tax on them.
posted by Mid at 10:15 AM on December 1, 2016 [4 favorites]
posted by Mid at 10:15 AM on December 1, 2016 [4 favorites]
-S corp owners are required to take a reasonable salary for tax purposes
-S corp owners can, in accordance with the shareholder agreement, take draws above and beyond this amount and this is fine from a tax perspective (provided there is also a reasonable salary)
-Personal expenses paid out of business accounts should be recorded as owner draws, but:
---it is not ok to deduct personal expenses as business expenses
---commingling funds like this puts the corporation's liability shield in jeopardy
---sometimes this is not ok, b/c of trust fund taxes: if the company collected sales tax from customers or income/payroll tax withholding from employees, those funds are considered held in trust for [govt agency] until remitted to [govt agency] and cannot be used for other corporate/personal purposes. Mishandling these funds can have serious consequences.
---in the event the corporation files for bankruptcy these transfers/draws could be considered fraudulent conveyances (remember: "S corp" is a tax classification, not a legal classification, the company as a corporation or LLC is still a separate legal entity); this may also apply to tax reimbursements from the company to the owner (for tax liability on owner's share of profits) if there isn't a shareholder agreement obligating the corporation to make the reimbursements.
posted by melissasaurus at 12:49 PM on December 1, 2016 [6 favorites]
-S corp owners can, in accordance with the shareholder agreement, take draws above and beyond this amount and this is fine from a tax perspective (provided there is also a reasonable salary)
-Personal expenses paid out of business accounts should be recorded as owner draws, but:
---it is not ok to deduct personal expenses as business expenses
---commingling funds like this puts the corporation's liability shield in jeopardy
---sometimes this is not ok, b/c of trust fund taxes: if the company collected sales tax from customers or income/payroll tax withholding from employees, those funds are considered held in trust for [govt agency] until remitted to [govt agency] and cannot be used for other corporate/personal purposes. Mishandling these funds can have serious consequences.
---in the event the corporation files for bankruptcy these transfers/draws could be considered fraudulent conveyances (remember: "S corp" is a tax classification, not a legal classification, the company as a corporation or LLC is still a separate legal entity); this may also apply to tax reimbursements from the company to the owner (for tax liability on owner's share of profits) if there isn't a shareholder agreement obligating the corporation to make the reimbursements.
posted by melissasaurus at 12:49 PM on December 1, 2016 [6 favorites]
in the event the corporation files for bankruptcy these transfers/draws could be considered fraudulent conveyances
Or possibly even just avoidable preferential transfers. Same result: money would have to go back to the corporation for the benefit of the claimants.
posted by praemunire at 1:08 PM on December 1, 2016
Or possibly even just avoidable preferential transfers. Same result: money would have to go back to the corporation for the benefit of the claimants.
posted by praemunire at 1:08 PM on December 1, 2016
This sort of thing is not a good way of doing business, precisely, but it is totally normal, and I just want to point out that the bits about the corporation's limited liability, about bankruptcy, any of that? Those things are your boss' problem. She should be talking about them with her CPA if she cares about them. They could mean things could be expensive for her later, but in the moment, the thing you need to keep in mind is that this isn't an ethical problem for you to give her access to her company's money when she wants it. She might not make the best decisions about that, but it's not seriously unethical for the sole owner of the business to screw up their own business.
It is quite possibly not good business. What you've identified isn't an ethical lapse so much as that your boss isn't making enough money to cover her lifestyle expenses, and that she's intending to keep covering her lifestyle expenses at the cost of the business.
You don't need to do things differently in the course of your job. You do probably need to find a different job. It is vanishingly impossible, in my experience, for the employees of a mismanaged small business to actually talk their bosses into managing those businesses better. If she didn't listen to you when you told her that you thought this was illegal, even if you were wrong, enough to go ask an expert or something? She's not going to listen to you about anything else. Just start wrapping up as best you can and then move on. Your skills will be valued elsewhere with people who will make better use of them. You cannot save people who won't save themselves.
posted by Sequence at 5:11 PM on December 1, 2016 [4 favorites]
It is quite possibly not good business. What you've identified isn't an ethical lapse so much as that your boss isn't making enough money to cover her lifestyle expenses, and that she's intending to keep covering her lifestyle expenses at the cost of the business.
You don't need to do things differently in the course of your job. You do probably need to find a different job. It is vanishingly impossible, in my experience, for the employees of a mismanaged small business to actually talk their bosses into managing those businesses better. If she didn't listen to you when you told her that you thought this was illegal, even if you were wrong, enough to go ask an expert or something? She's not going to listen to you about anything else. Just start wrapping up as best you can and then move on. Your skills will be valued elsewhere with people who will make better use of them. You cannot save people who won't save themselves.
posted by Sequence at 5:11 PM on December 1, 2016 [4 favorites]
This thread is closed to new comments.
posted by solitary dancer at 11:39 PM on November 30, 2016 [9 favorites]