If you’ve ever spoken with a business owner, then you likely get the same recommendation as to what you should do when starting up a business. They will all suggest keeping their business and personal assets separate. However, not everyone does this. Not only is this a bad idea legally, but it can be logistically bad as well. Here is why you shouldn’t commingle your business and personal expenses.
What does it mean to commingle your business and personal expenses?
Commingling funds means that you treat your business’s money as if it were your own. Someone who commingles their funds will treat their business funds as if it was their own personal money in their pocket regardless of whether they are buying or selling.
Here are some common examples of how commingling occurs:
- Transferring money in between your personal and business accounts without documentation.
- Making withdrawals from your business account to pay personal expenses without documenting it
- Depositing personal money to pay for your business expenses
- Using a personal credit card for business expenses
- Writing a business check for personal expenses
- Using the same account for both personal and business expenses
Why it’s not a good idea to commingle business and personal expenses
If you commingle your funds, you will likely lose most of your liability protection because you are essentially “piercing the corporate veil.” This means that everything you did to form your corporation or LLC will be for nothing when it comes to protecting your assets if a creditor notices that that veil has been pierced. This can come up in court hearings and whether you should be held liable for any debt and lawsuit that may happen to your company.
Here are even more reasons why it’s not a good idea to commingle your business and personal expenses.
You’ll create a tax time nightmare
Filing your taxes is easy when you have an account and card that is dedicated to your business expenses. You can easily see what you spent money on, and where you need to add deductions for your purchases. When you commingle accounts, you have to find your paper trail and see where you made the purchase and when. It creates a tax nightmare because nothing is organized, and it’s not easy to see what you made and what you need to pay taxes on as a business.
You will miss out on deductions
Purchases get lost when you don’t have things separate. As we mentioned in the earlier example, without your accounts and cards separated, you cannot see what you can deduct on your taxes, which means you’ll be missing out! It’s also more difficult for your bookkeeper and accountant to find those deductions because they don’t have access to all the information.
It’s not professional
Mixing your personal and professional life is not professional, and that’s the bottom line. While it is okay to expense things like your home office that you use to do your job, it’s not okay when your personal and business life becomes so intertwined that there is no separating it. This not only makes it difficult for other professionals to help you with aspects of your business, like consulting and finance, but it makes it difficult for yourself as well.
You can avoid triggering IRS audits
IRS audits might feel random, but they go after suspicious activity more than anything else. If you should be in a position where your business will be audited, you could be in a lot of trouble for commingling funds. All those things you did to shield yourself from your business lawsuits won’t hold up when the IRS comes to audit your business. Finding those expenses that you made in between cards and finding your accountability will be much more challenging. Not only will trying to fulfill your audit be difficult but keeping things separate can even help you avoid the whole situation
How do I fix my situation if I’ve commingled funds?
When you start your business, it can be easy to commingle your funds accidentally. But, recognizing this mistake early is what makes it easier to fix things. First, identify which transactions and deposits were personal. Make sure that common expenses that are seen as a high priority to the IRS like travel, meals, entertainment, etc. are noted. Things that should have been personal can and should be reclassified. If you’re not sure how to do this, you can speak with your bookkeeper and your accountant to help get things sorted out.
When starting a business, the number one suggestion is to keep your personal and business stuff as separate as you can. Even if you’re running a business out of your home, this is still important to do! Hopefully, this guide has helped shine the light on why it’s important not to commingle your business and personal expenses.