Mixing business finances with personal, what could go wrong? A lot! And it should be avoided. Commingling is mixing personal funds with business funds or using business assets for personal use. Keeping business assets and accounts separate from personal is a common challenge for small business owners. New business owners commingle personal and business resources when money gets tight. Forming LLC’s and Corporations creates a barrier between business assets and personal assets known as a “corporate veil.” Commingling makes is hard for judges to clearly see where the LLC or Corporation stops, and personal life begins. This confusion creates an opportunity to “pierce the corporate veil”; meaning creditors can access personal assets and other personal resources to pay off the debts and liabilities generated by the business. This should always be avoided, and the best way to avoid it is to know what commingling looks like.
What are examples of commingling?
- Using money that was received from a customer for personal expenses.
- The same bank account is being used for both business and personal.
- Transferring money between a business bank account and a personal bank account without keeping a record of transactions.
- Signing personal guarantees.
- Obtaining a business loan and using personal assets as collateral.
- Using a personal credit card for business expenses.
- Using business funds to buy personal assets.
While these are just some examples of commingling, there are plenty of other ways it can be done. It also has a major effect on accounting and tax preparation.
How does commingling affect accounting and tax preparation?
Accounting shows how a business is performing, what is being done correctly, and what needs improvement. Disorganized accounting prevents owners from knowing what parts of the business is successful and which parts are failing. Which product has the highest gross revenue? What ad is bringing in the highest return on the investment? Commingling makes these tasks and questions difficult to answer and often inaccurate. It also causes huge problems when it comes to filing taxes. Business owners can save a significant amount in taxes by deducting business expenses allowed by the IRS. However, if the same bank account is used for business and personal expenses, how can a business owner prove that any expense claimed as a deduction is for business purposes?
What actions can business owners take?
- Keep separate checking and savings accounts for the company.
- Use the company credit card to pay for all business invoices.
- Make sure all invoices are made out to the company.
- Ensure the company is officially known by creating business cards, sending invoices using company name, and have all associated contracts in company’s name.
- File all required State and Federal Tax Returns
- Hiring a CPA to correctly record what transactions are personal and what are business
Commingling assets needs to stop. It can cause major legal problems for business owners. LLC’s and Corporations are created to protect business owners from needing to use personal assets to pay off company debts and liabilities. Corporate entities literally exist to protect personal assets, but people still self-sabotage by commingling. They end up piercing the corporate veil, and that has dire consequences for their personal and family assets.