Written by Haans Mulder, JD, MBA, MST, CFP®
For the last 18 years, I’ve helped many business owners whose spouses have handled the books and are a signer on the company bank account. This arrangement has a lot of advantages. First off, you don’t have to incur the cost of hiring an employee or an outside company to perform these services. This can be especially important during the early stages of a business. Second, the bookkeeping position often has flexible hours so a spouse may be able to do this while also helping raise a family. Finally, the risk of an employee embezzling funds from the company is eliminated.
I used to think this was one of the best partnerships a business could have. I haven’t entirely changed my opinion, but I’ve seen some business owners go through very difficult financial times and this has made me rethink the utility of this arrangement.
Here’s the concern: If a spouse has this financial and legal authority, he or she is also exposing him or herself to the IRS and the State of Michigan if taxes are unpaid. In other words, if your business is experiencing financial problems and is unable to pay taxes (whether it’s for the business or your employees), you’ll be exposing you and your spouse’s assets (i.e. “all” of your personal assets) to the State of Michigan and Federal government. Even worse, it doesn’t matter if you have an LLC or a corporation to legally protect you.
We’ve had quite an economic run and a vast majority of businesses are doing incredibly well. This makes right now a prime opportunity to lessen the risk of the State of Michigan or IRS from being able to pursue all your personal assets at some point in the future. To do this, you should review company bookkeeping practices and the internal controls of your business. You should also have a legal review of your LLC or corporate documents to understand how your governance structure (who is the owner, director, or otherwise business owner) may unnecessarily expose you to this liability.
If you have any questions regarding this risk or how to mitigate it, please feel free to contact me (Haans Mulder).