ABC Taxes, Tips & Tools

Com­min­gling of funds is bad.

What is com­min­gling? It means that you are treat­ing the business’s funds as your own.  For pur­poses of this dis­cus­sion I am talk­ing business/owner mix­ing of funds, but it can apply to the Business/Client rela­tion­ship or the Fiduciary/Client rela­tion­ship as well.

Exam­ples of com­min­gling of funds:

• Deposit­ing checks made payable to your busi­ness into your per­sonal bank account
• Mak­ing with­drawals from your busi­ness check­ing account to pay obvi­ously per­sonal expenses with­out documentation
• Using the same bank account or same credit cards for your busi­ness and per­sonal needs.
• Writ­ing busi­ness checks for obvi­ously per­sonal expenses
• Mov­ing money back and forth between your busi­ness and per­sonal accounts with­out documentation.
• Pay­ing a busi­ness debt or oblig­a­tion with per­sonal funds. Whether it is a large sum of money or just office sup­plies, the busi­ness owner should doc­u­ment it.
• Another way to com­min­gle funds is to pay per­sonal oblig­a­tions with busi­ness funds.  Busi­ness own­ers should pay them­selves with div­i­dends, pay­roll, or some other legal method, deposit their pay into a sep­a­rate account at a com­pletely dif­fer­ent bank, and use that account for their per­sonal expenses.
• Busi­ness own­ers often hold their busi­ness accounts and loans at the same bank where their per­sonal accounts are held.  This is usu­ally a bad idea as the bank may have the right to off­set dif­fer­ent accounts against one another.  Even though it is not inten­tional, this is com­min­gling of funds.

To avoid com­min­gling, the busi­ness owner must doc­u­ment every time that money moves between their busi­ness and per­sonal accounts.  That doc­u­ment might be a pay stub, a promis­sory note, or a sim­ple reim­burse­ment slip.  A few tips:

• Avoid pay­ing busi­ness debt with a per­sonal check or per­sonal debit card.  It is bet­ter to write a per­sonal check payable to the busi­ness and then pay the debt with a com­pany check.  More­over, in exchange for that per­sonal check, the busi­ness should give the busi­ness a promis­sory note with an inter­est rate bet­ter than the applic­a­ble Fed­eral Rate.
• For small items like a quick run to the office sup­plies store, sub­mit a reim­burse­ment request to the busi­ness along with a receipt, even if the busi­ness owner is the only employee of the busi­ness.  Avoid con­stant reim­burse­ments.  When­ever pos­si­ble, pay for busi­ness expenses with a busi­ness check.
• When the busi­ness owner needs to pay a per­sonal oblig­a­tion, the busi­ness must declare a div­i­dend, cut the “employee” a reg­u­lar pay­roll check, cut the owner or mem­ber a draw, or have the busi­ness give them a loan.  Always cre­ate a pay-stub, div­i­dend state­ment, or promis­sory note to doc­u­ment the transaction.

Pro­tect the cor­po­rate veil: If hav­ing your cor­po­rate veil pierced sounds like a bad thing, it is.  All that work you did to form an LLC or corporation–filling out Arti­cles of Orga­ni­za­tion, pay­ing fil­ing fees to your state, draft­ing an Oper­at­ing Agreement–will be for noth­ing as far as pro­tect­ing your assets from cred­i­tors if your veil is pierced.  There are sev­eral fac­tors that courts look at when decid­ing whether to pierce your company’s veil and hold you per­son­ally liable on com­pany debts and law­suits.  One impor­tant fac­tor is the pres­ence of com­min­gled funds.  If you treat your business’s money the same as your own, then you risk the expo­sure of your per­sonal assets.

Mix­ing busi­ness and per­sonal funds is sloppy.  It’s bad legally, for the rea­sons above, and it’s sim­ply bad busi­ness.  It also makes account­ing dif­fi­cult.   Account­ing tells you how your busi­ness is per­form­ing, what is doing well and what needs improve­ment.  When you have sloppy records you won’t be able to fig­ure out which parts of your busi­ness are win­ners and which are losers.  You won’t know which prod­ucts have the high­est mar­gins, or which ads bring the high­est return; you won’t know what is work­ing and what isn’t.

Com­min­gled accounts make it harder to spot fraud­u­lent charges: If your busi­ness and per­sonal expenses all run through the same account, it may be hard for your bank, or your accoun­tant to spot fraud­u­lent charges before it’s too late.  An inter­net charge on your bank or credit card state­ment to Microsoft Xbox would stand out on record that con­sists entirely of busi­ness charges, but if the owner is in the habit of pay­ing for their per­sonal expenses out of their busi­ness account, not so much.  Valu­able time to act on the fraud may pass while the bank, book­keeper or accoun­tant spends time inves­ti­gat­ing whether the charge is valid or not-if they ask at all.

As for taxes, you can’t deduct what you can’t doc­u­ment. Keep­ing track of your busi­ness income and expenses is cru­cial to min­i­miz­ing your taxes and max­i­miz­ing your deduc­tions.  Many small busi­ness own­ers pay more taxes than the law requires because they don’t have a good sys­tem for keep­ing track of expenses.  If you main­tain a sep­a­rate bank account to run all your busi­ness trans­ac­tions through, and only your busi­ness trans­ac­tions, you have an impro­vised way of track­ing all your busi­ness income & expenses.  You can sim­ply use your bank state­ment.  Besides noth­ing makes a tax audi­tor drool like a set of com­min­gled books, except per­haps a per­son who says they have no records at all.

Per­haps this doc­u­men­ta­tion all sounds like a lot of has­sle, but Art & Busi­ness Con­sult­ing  is here to help.  We can help pre­pare promis­sory notes to doc­u­ment your loans to your busi­ness, we can advise you, and we can  help you set up your account­ing sys­tem.  We can even keep track of your income, expenses, loans, repay­ments, cal­cu­late the inter­est, etc. for you.  A lit­tle record keep­ing now can save a lot of has­sle later on. Busi­ness ser­vices are our busi­ness. If you need help, Please give Art & Busi­ness Con­sult­ing a call. We would love to engage you as a client.

The usual dis­claimers: Although ABC has made every effort to insure the accu­racy of Taxes, Tips and Tools, mis­in­for­ma­tion, dis­in­for­ma­tion, changes, mis­takes, typos and hack­ers hap­pen, there­fore Art & Busi­ness Con­sult­ing LLC takes no respon­si­bil­ity for any action taken or results based on the infor­ma­tion sup­plied here in.   Inter­nal Rev­enue Ser­vice Cir­cu­lar 230 Dis­clo­sure:  As pro­vided for in Trea­sury reg­u­la­tions, advice (if any) relat­ing to fed­eral taxes that is con­tained in this com­mu­ni­ca­tion (includ­ing attach­ments) is not intended or writ­ten to be used, and can­not be used for the pur­pose of (1) avoid­ing penal­ties under the Inter­nal Rev­enue Code or (2) pro­mot­ing, mar­ket­ing or rec­om­mend­ing to another party any plan or arrange­ment address herein.  Art & Busi­ness Con­sult­ing LLC cur­rently does not have a cer­ti­fied pub­lic accoun­tant or an attor­ney on staff; this infor­ma­tion is purely for edu­ca­tional pur­poses and not to be con­strued as legal or finan­cial advice. Art & Busi­ness Con­sult­ing LLC and its employ­ees, mem­bers and asso­ciates are not engage to prac­tice law; you always should dis­cuss legal mat­ters with your attor­ney before talk­ing to any­one else.

Tags: accounting, co-mingle, commingling, corporate veil, fraud detection, record keeping, taxes

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