Whipping out your business credit card to pay for a gift this holiday season may not be the best thing to do. But it's understandable. For many, it can be hard sometimes not to use your business funds for personal expenses and vice versa. This is true especially for startups. But there is a very good reason you should not: it allows the space for the corporate veil to be pierced.
So, this New Year, resolve not to commingle business and personal funds. Below is an explanation of why this is so important.
What does it mean to commingle funds?
Commingling of funds means just that: treating your business money and personal money as though they are the same. Examples below provide a better understanding of what this may look like.
- Depositing into your personal account a check made payable to your business.
- Using the same bank account for personal and business expenses.
- Using a business credit card for personal expenses.
- Using a personal credit card for business expenses (often done to get more points on the card).
- Making withdrawals from a business account without keeping documentation for personal expenses.
- Moving money back and forth between accounts.
What are the consequences of commingling funds?
When you commingle funds between your personal and business accounts, you risk the "piercing of the corporate veil." This means that – for LLCs and corporations specifically – your liability protection could be at risk, which in turn means creditors could potentially come after your personal assets if your business has debts or there are any lawsuits against you.
For many of you, it's that protection from personal liability that was instrumental in forming your company as an LLC or corporation.
Further, commingling funds makes it difficult to keep accounting accurate. This is a problem for many reasons, including:
- It could impact taxes.
- You may not have a complete understanding of your business's performance.
- You may find it harder to determine what needs to be improved and what doesn't.
- It could affect the understanding of where profits are coming from and where they aren't – what services or products are doing well and which aren't.
What should you do in 2020 to stop commingling funds?
In 2020, you must stop commingling funds and maintain the formalities established when you form your LLC or corporation. You cannot treat your business funds the same as your personal funds. How to un-commingle funds is rather simple:
- Keep separate bank accounts for business and personal needs.
- Do not use or transfer money from one bank account to the other account.
- Keep separate credit cards for business and personal needs.
- Do not use one credit card for a purpose other than its intended use: business or personal expenses.
- Keep your business records clean.
- Be diligent about separating and tracking your business expenses and income.
For 2019, you may want to review your expenses and identify transactions where personal or business funds were used in error – like that holiday gift you may have purchased with a business credit card. Expenses of particular importance to the IRS, however, include things like meals, entertainment, travel, home office expenses, and vehicle expenses. If you paid for any of these things with personal funds even though they were related to the business or vice versa, you may be able to reclassify some of them as fringe benefit compensation.
To make sure you are doing it right, always feel free to consult with an experienced business attorney. In fact, make an appointment today so you do, indeed, start the New Year off on the right track.