You’ve registered a company, and you’re ready to land your first customers. With all the steps you need to take to make that happen, you open a business account that you occasionally use to pay utility bills. No harm, no sweat, right? Wrong! When you commingle your business and personal funds, you could land in a heap of trouble with the Internal Revenue Service.
Besides the tax management headaches, accounting issues and legal ramifications, there are a multitude of problems associated with the mingling of business and personal expenses. But before we dive into the details, have a look at the actions that count as commingling accounts:
- Writing checks from personal accounts to pay for business expenses.
- Taking money from a business account for personal use.
- Transferring money to accounts without documentation.
- Sharing an account for personal and business transactions.
- Depositing checks signed for a business account in your personal account and vice versa.
Potential Consequences
Below are some of the ramifications people face when they commingle their business and personal costs.
Legal Issues:
If someone was to sue your business, your lawyers would have a hard time presenting your case with a money trail and documents. On the other hand, the accusing party will have a stronger case with evidence of blended assets. This will open your personal expenses to evaluation by the court.
Courts could also rule that you are not entitled to limited liability in operating your corporation. In fact, you could be asked to put your personal property on the line, despite it being a separate entity from your business.
Unorganized Data:
It gets difficult to keep track of transactions if you transfer money between accounts frequently, causing an unpleasant mess of unorganized data. You won’t know your business expenditures at a moment’s notice, and it becomes increasingly frustrating to calculate the money spent in running your corporation smoothly.
On the contrary, having separate accounts makes it easy to get an overview of the personal budget, as well as check profits and losses to ensure you’re doing enough to keep your business afloat.
Miscalculations in Taxes:
When it’s finally time to calculate the income and costs for the year, the last thing you want to do is spend time separating business and personal expenditure. When it comes time to prepare your tax file (or share everything with an accountant), a detailed collection of company-only expenditures is going to save you a significant amount of hassle and time.
Having a separate account could also save you from getting in legal hot water, so make sure that you’re only using the funds present in your company account for company-related expenditures. This will make it easy for the IRS and your accountant to identify the difference.
Accounting Problems:
Lack of audit trail aside, it would be a huge task for your accountants to deal with separating expenses, especially during tax season. The slightest of errors could impact your business in general. In addition, you might be asked to pay an excessive fee for last-minute corrections.
As a result, it’s always best to keep enterprise and personal expenses separate. Doing this would not only do accountants a favor but facilitate your business growth.
Unprofessionalism:
As your business picks up the pace, you will come across investors who are willing to buy your shares, advertise your product, and help promote your corporation. Commingling your business account with a personal can turn away many great opportunities for growth due to it being an unprofessional move.
Moreover, some venture capitalists will require you to share information about your existing cash flow, either in the form of granting permission for them to access data from your shareholder report, or in the form of bank account statements. If you can’t separate personal and business expenses, you risk losing out on potential investment opportunities.
How to keep business and personal transactions separate
Besides the obvious choice of not using your business account for household expenditures, you can take these steps to ensure a more pleasant experience in business proceedings:
1. Invest in bookkeeping:
Bookkeeping is one of the best ways to prevent the blending of expenditures. Even if you’ve already mixed a few transactions, bookkeeping will help ease the process of separating the expenses. Bookkeepers will help build an infrastructure that utilizes track records to categorize business and personal expenses accurately.
2. Make it a habit to review your expenditures:
Once your accounts are totally separate, make sure to occasionally review both business and personal expenditures. A quick glance could save you from future dismay.
3. Split personal & business cards:
The final step you can take in streamlining your accounts is keeping personal and business credit cards unconnected. If anyone mixes these up by accident, have a written track record of the event. Lastly, make sure to use separate credit cards for office and home purchases.
It’s not uncommon for a company owner to face a scenario that may require him or her to pull in business money to fund a personal need. While it isn’t always avoidable, the advice and suggestions mentioned above can help you do your best to keep things above board. By separating your corporate and personal finances, you’ll be safeguarding your future from repercussions from the IRS.
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Mixing business and personal expenses is one of the most common mistakes new business owners make. While it happens often doesn’t mean that you cannot avoid it. Being able to separate your business and personal expenses will help you set sail your business without much hassle especially with the IRS audit. By knowing the dangers of mixing your business expenses and personal expenses, you can avoid it.
