Regular Withdrawals

April 13, 2006

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In order to avoid certain fraud restrictions when withdrawing funds from the business, small business owners need to be careful about authorization and documentation for these transfers.

One of the factors that can indicate actual fraud involves the timing of the transfers. Transfers (for salary, loans and leases or distributions of earnings) that occur suddenly, when the business entity experiences financial difficulty, indicate that the motive for the transfers was avoidance of creditor's claims. Thus, fraudulent intent may be inferred from this type of conduct.

Accordingly, withdrawals should be made on a regular basis, and authorized in uniform amounts. If the business entity subsequently experiences financial difficulties and withdrawals continue, in accordance with a long established pattern, a court is much less likely to infer fraudulent intent. Thus, a pattern of regular withdrawals can work to defeat a finding of actual fraud, even as the withdrawals continue.

Note that if the withdrawals are for return value and not on account of the owner's interests, constructive fraud provisions under the Uniform Fraudulent Transfers Act, as well as under the state corporation statutes and limited liability company (LLC) statutes, will not apply to the withdrawals. Thus, in particular, a regular pattern of withdrawals in the form of payments for salary, loans and leases usually will be the most effective strategy.