When your business and personal finances are not clearly divided, you can face serious tax consequences or even lose the limited liability protection that your corporation or LLC provides.
When you commingle your funds, you are mixing business and personal funds and expenses.
Some of the most common ways to commingle are:
• Transferring money between business and personal accounts without documentation
• Writing business checks for personal reasons/expenses and vice versa
• Having only one bank account for personal and business needs
• Depositing business checks into your personal bank account
• Using the business credit card for personal expenses or sharing a credit card for both business and personal
• Using business inventory for personal use.
The main problems with commingling are:
• Increased accounting/bookkeeping costs. Bookkeeping time is increased significantly when we have to spend time identifying and separating personal expenses from business expenses
• Risk of IRS audit, a more extensive audit or additional audits into both personal and business
• Risk of losing the limited liability protection – “piercing the corporate veil” that your corporation or LLC provides.
The money that comes into a business is meant to be used strictly for business purposes. That money is not to be used to pay your mortgage, rent, groceries, daycare, personal meals or vacations. If you work from home, you can take a reasonable portion of certain household expenses such as rent, phone, utilities and internet (see our information on Accountable Plans for the proper way to document and be reimbursed for such expenses).
Of course, we know you need to be paid from your business in order to pay for those personal expenses. There are two acceptable ways to do this: 1) put yourself on salary; or 2) write a check to yourself in the form of a distribution or owners’ draw. The method you choose will depend on the type of entity that has been established for your business and how you are set-up for tax purposes. Please contact us if you would like a consultation that is specific to your business.
Bottom Line: Keep your business and personal money separate.