One of the principal advantages of incorporating a business is that it affords shareholders limited liability protection. A shareholder in a duly authorized corporation is not individually liable for the debts of the business. Third-party creditors of the corporate entity have no legal recourse against shareholders in the event the corporation defaults on its debt obligations. However, a shareholder who uses the company car on a regular basis for his own personal business may risk losing his limited liability status.
Corporation as Alter Ego of Its Shareholders
To avoid fraud and injustice to third-party creditors, in appropriate circumstances, courts may disregard the corporate entity entirely and hold individual shareholders personally liable for the debts of the corporation. Piercing the corporate veil is a process whereby a court examines whether the shareholders, by disregarding the existence of the corporation, conducted the business in such a manner that it operated in effect merely as their alter-ego.
Commingling of Corporate With Personal Assets
One of the most common occurrences that support a finding that an individual shareholder failed to treat the corporation as a separate legal entity is the commingling of corporate assets with those of individual shareholders, or the use of corporate property for the personal use of individual shareholders.
Company Car
Use of a company car, in and of itself, without additional evidence of intent to disregard the corporate identity, may not be a sufficient reason for piercing the corporate veil. However, if the company car is a significant asset for the operation of the business and the shareholder uses it extensively for personal business, it may be a determinative factor in concluding that the shareholder acted in a manner inconsistent with intent to accord a separate legal identity for the corporate entity.
Tax Ramifications
A shareholder who uses a company car extensively for his private personal business may encounter difficulties claiming a deduction for the car as a legitimate business expense. For corporate tax purposes, a shareholder who wishes to use the corporate car for his personal business should maintain meticulous records, so he can document the manner in which he allocated the related expenses of the vehicle between corporate and personal business uses. For purposes of claiming the allocated portion of the use as a business expense, the shareholder must be able to demonstrate that his apportionment of expenses was accurate and reasonable.
