Commingling funds blends personal and business finances, risking legal liability and corporate protections. Proper separation safeguards assets and ensures accurate financial tracking.
By Brad Nakase, Attorney
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The last thing anyone wants after putting in so much time and effort to make a product or offer a service is to deal with additional bureaucratic red tape. However, there are a number of reasons why you should be careful not to mix your personal and company finances in one bank account.
Any company owner worth their salt knows the feeling of having a deal closed and the satisfaction of receiving payment in the form of a check: it’s hard to contain your excitement.
We get it. But before we go on, let’s delve into the meaning of the term “commingling” and the potential consequences it might have for your corporation or limited liability company (LLC).
The term “commingling of funds” describes the practice of handling company money as personal money. There are a few methods to mix funds:
A legal concept known as “piercing the corporate veil” states that if assets are mixed, the liability protections afforded to an LLC or company may be compromised.
Getting your “veil pierced” seems like a horrible idea.
Indeed, it is.
If the corporate veil is breached, all the hard work you put into forming an LLC or corporation—including completing the Articles of Organization/Incorporation and paying the state registration fees—will be for naught in shielding your assets from creditors.
Courts consider a number of things when determining whether to pierce the corporate veil and make you personally answerable for business debts and litigation. Having commingled funds is a major consideration. The danger of having your personal assets exposed increases when you handle company funds similarly to your own.
This indicates that you failed to maintain your limited liability company or corporation as an independent legal organization by failing to keep up with the required formalities.
A dedicated business account might help you project an image of professionalism.
It is a poor practice to combine personal and corporate finances. In addition to being terrible for business, it’s also problematic from a legal standpoint for the reasons mentioned above. Additionally, it brings up difficulties and inaccuracies in accounting. There is more to accounting than simply filing your taxes.
Accounting provides insight into the strengths and areas for growth of your company. Inaccurate bookkeeping and accounting prevent you from knowing which aspects of your company are successful and which are not. You won’t be able to tell which advertisements generate the most profit or which items have the best gross margin.
You’ll just be guessing. For this reason, it is essential to have a dedicated company checking account and reliable small business accounting software. Everything from little, one-person operations to massive, multi-location corporations can find a suitable solution among the many excellent options available.
Preparing the company tax return will be much easier if you are meticulous about keeping the books and records tidy, separating and monitoring the business’s income and spending.
When you can’t provide evidence, you can’t make deductions.
In order to minimize taxes and maximize deductions, it is necessary to keep track of company revenue and costs.
The lack of an adequate system for keeping track of costs is the main reason why most small business owners end up paying more than what is required by law. One “poor man’s” approach to keeping tabs on company spending is to open a second bank account just for that purpose. To keep track of all the money you’ve spent on your business, just look at your bank statement.
In the process of forming a limited liability company or corporation, you may have mixed up your funds. Finding the error quickly makes it easier to correct. First things first, you need to find all of the personal transactions. The IRS pays a lot of attention to common expenses like food, entertainment, travel, car repairs, and home office costs.
It is possible to reclassify some costs that should be considered personal. It is possible to change them into a loan to the company or a bonus benefit payment. The shareholder loan is more complex and might not be the ideal choice if you don’t have a certified public accountant on your side.
In sum, commingling money might result in a greater number of legal issues than it does in terms of tax issues. You probably formed an LLC or company mainly to shield yourself from individual responsibility in any court actions regarding your business. Commingling money puts that protection at risk.
Have a quick question? We answered nearly 2000 FAQs.
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