Commingling Funds: Just Say NO!
Commingling....sounds fun, right? Well, unfortunately, if you are a business owner, commingling can get you into all kinds of hot water.....
Commingling funds is something that I see fairly often when working with clients and many business owners are unaware of the negative consequences of such a practice. Simply put, commingling means mixing together personal and business funds.
Here are some examples:
- You make personal purchases on your company credit card.
- You set up your mortgage payment to be deducted from your business checking account.
- You "borrow" funds from the company to be used for personal expenses.
- You deposit your personal tax refund directly into your business checking account.
Even if you reimburse the company for any of the above expenses, you are still blurring the lines between personal and company expenses by not keeping these transactions completely separate and this can lead to unintended consequences.
So, what's the problem with mixing my personal and business funds, you say? It's my company, I earned the money, why can't I just use the money however I want?
The number one reason is because the IRS says you can't.
The IRS has clear and distinct rules on what a business must do in order to be taxed as a business. The rules are different for the type of business (sole proprietorship, S Corp, Partnership, etc.), but the underlying basis is that the business must function as a separate entity from the owner(s). See link at end of this article if you want to learn more about the various types of business structures and how to choose the one that is right for you.
The number two reason not to commingle is to minimize your personal risk.
Most businesses choose to form some type of legal entity, such as a Limited Liability Company, S Corporation or C Corporation to keep their personal assets safe from claims against the business, such as lawsuits or tax levies. Commingling of funds for these types of entities is strictly prohibited and can have serious consequences to the business owner if the rules are not followed. The most serious being the loss of the personal asset protection provided by the business entity. If the business is found not to comply with the IRS rules for keeping business funds and other assets separate from personal, the business can lose its standing as an LLC, S Corp or C Corp. This is called "piercing the corporate veil". When this happens, the owner's personal assets can be seized to pay business debts.
Number three reason: Your business can fail if you deplete your business of its cash reserves.
If the first two reasons aren't compelling enough, keep in mind that one of the top reasons new businesses fail is because some owners deplete their business's cash reserves by spending the funds on personal expenses, leaving the business without enough funds in the bank to meet operating expenses.
Ok, you say, you've convinced me! How do I keep business and personal expenses separate?
The first step is to pay business expenses with business funds and vice versa. This means you should have separate checking and credit card accounts for the business and use them strictly for business expenses, as well as use your personal accounts to pay only personal expenses. If the business is short on cash, you can loan money to the business or contribute equity to the business, but make sure you keep track of these transactions correctly on your books. If you have a sole proprietorship or S Corp, you can also take a draw from the company in order to have funds to pay your personal expenses. In a S Corp, you are required to pay yourself a "reasonable" salary in addition to any draws you take. If you are unsure what a reasonable salary is or how to set yourself up for draws, consult with an accountant.
Keep receipts for all business transactions and make sure your bookkeeping is done properly so there is a clear accounting of all of your business transactions. If you need help getting set up or with your bookkeeping, consult a qualified accountant or bookkeeper to help you with this task. Believe me, they will pay for themselves!
Have more questions or want to add your two cents? Leave a comment below!
Check out the links below for more information related to this article: