Many small business owners loan money to their business at some point — whether it’s to cover startup costs, manage cash flow, or fund growth. But here’s the problem: most don’t realize that failing to properly document these loans can put both their business and personal assets at risk.
If the IRS ever reviews your books and sees “mystery money” moving in and out, they might not treat it as a loan at all. Instead, it could be reclassified as income — and suddenly you’re facing taxes, penalties, and questions you don’t want to answer.
Even worse, without the right paperwork, you could blur the line between your personal and business finances. That’s exactly what the courts look at when deciding whether to uphold or “pierce” your corporate veil. In other words, sloppy documentation could erase the very liability protection you set up your business for in the first place.
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