How and Why to Avoid Commingling Personal and Business Funds
If you run a business, particularly one that isn't operated as a sole proprietorship, you should be rather careful about commingling funds. Using business funds to pay for personal expenses could run afoul of the law, contracts, ethical, and fiduciary duties.
Even if you operate a sole proprietorship, you may want to follow the following advice, that way, when the time comes to grow, your business doesn't have a questionable and difficult to understand financial history. It'll also make life easier come tax time.
What Is Commingling Funds?
Just like the phrase sounds, commingling funds involves the mixing of personal and business monies in one account. However, it can also include using business funds to pay for personal expenses, or vice versa.
What's the Big Deal?
If there is a corporate structure shielding you from personal liability, if you commingle personal and business funds, you may destroy that personal liability protection. When another individual or business is seeking to hold you or your business liable, showing that a business owner has commingled personal funds with business assets can "pierce the corporate veil."
Also, if you serve as fiduciary for the business, or to your business partner, then you may be violating ethical, and legal, duties if you misappropriate business funds for personal expenses.
Keep Separate Accounts
Creating separate accounts for personal and business finances is the easiest way to ensure that you don't commingle your funds. Obviously, everything personal in nature should be paid from your personal account, while business expenses should be paid from your business account. The same goes for revenues. All revenue generated by the business needs to go through the business account.
Even if you receive a business check that you plan on using entirely to pay yourself, you should still deposit it into your business accounts before writing yourself a check. This will ensure that a clear "paper-trial" is created. Failing to keep separate accounts will require un-mingling funds, which is a complicated, and time consuming process.
Your Tax Preparer Will Thank You
Lastly, when you separate your personal and business accounts and use them properly, your tax preparer will thank you (and maybe even charge you less). Maintaining separate accounts will allow for easier accounting of what may be deductible business expenses, or preparing a Schedule C.
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