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.
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