Commingling occurs when one party mixes funds with that of another party. It typically takes place between spouses and business partners. While commingling is legal under normal circumstances, both parties expose themselves to risk when participating in the combining of funds. For example, when new properties or funds are acquired through marriage or business partnerships, the property is considered to be owned by both parties equally, or “community property,” and dividing it when the relationship ends can be complicated. To explore this concept, consider the following commingle definition.
Definition of Commingle
- To blend thoroughly together to make something whole
- To combine funds or assets together
Early 17th Century English com- ‘together’ + mingle.
Basics of Commingling
While it is legal for married couples or business partners to commingle funds, it is illegal for lawyers, guardians, and trustee to do so. In these cases, they must not commingle funds from clients with their personal funds as it can create a conflict of interest. To avoid this, trustees, guardians, and lawyers are responsible for setting up trust funds to keep clients’ assets separate from their own.
Unethical and Illegal Commingling
Certain acts when dealing with commingled assets for business purposes are considered to be unethical, and may actually be considered illegal commingling.
- Depositing checks into a personal bank account that are made payable to the business.
- Withdrawing money from a business bank account for personal expenses without proper documentation.
- Using one bank account for both personal and business needs.
- Writing a check, or using a bank card from a business account to pay personal expenses.
While these acts of illegal commingling may seem minor, it can make it difficult for people to keep exact calculations of their business income and losses. This in turn, can cause problems when it comes to filing personal and business taxes, and may result in an IRS audit along with future financial problems. In a circumstance where the business is a partnership, rather than a sole proprietorship, the actions may be considered a crime.
Commingling in Business Partnerships
When two or more people decide to purchase or begin a business together, each party typically invests something of value, such as money, assets, and expertise, to get the venture up and running. During the operation of the business, the partners may also contribute other funds or assets for various purposes. This is considered commingling in business partnerships. While this ends well for most business partners, occasions may arise where matters become complicated.
For example, if Joe and Rob go into business together, with Joe investing $50,000, and Rob contributing $100,000 in the start-up. After several years, however, the business begins to lose money and they decide to sell out to another company for $150,000. Joe wants the profit from the sale to be equally distributed between the partners, but Rob disagrees, as he believes he is entitled to recover his $100,000 investment from the sale. In this instance, the partners may have to hire a lawyer and go through court proceedings to fight for what they believe is rightfully theirs.
Assets Commingled in Marriage
It is common for married people to combine their funds, but doing so can become risky as some commingled funds become community property. State laws vary in how assets commingled in marriage are settled during divorce proceedings. Most states either follow the law of equitable distribution or community property.
Equitable distribution is defined as the distribution of property and debt obligations used by courts when marital property is divided. The term is misleading, however, as equitable distribution does not necessarily mean equal division, rather it means fair division. Generally speaking, the court distributes only the property and debt acquired during the marriage, though the division is not always 50/50. If the court determines that one spouse has very little, and the other has an abundance of wealth, the court may give the underprivileged spouse a greater share of the assets, or a lesser share of the debt.
The courts define community property as assets that two parties have acquired throughout their marriage. This is not just limited to gains in the marriage, as debts are also considered. During divorce proceedings in community property states, all assets and debts acquired during the marriage are considered community property. On the other hand, everything by the parties before the marriage, or before they commingled their assets while living together, remains their sole and separate property. During divorce proceedings, the court divides the community property and debts equally, regardless of the financial status of each spouse.
Related Legal Terms and Issues
- Asset – Any valuable thing or property owned by a person or entity, regarded as being of value.
- Community property – assets and funds owned or acquired by both partners in a marriage. Also referred to as “marital property.”