Why You Shouldn’t Commingle Business and Personal Funds
After all the hard work it takes to create a product or sell your service, the last thing most of use want to do is have more administrative hassles. Particularly after you’ve gone through the effort of forming an LLC.
When you finally make that sale, and collect that check (if you’ve ever been in business, you know the difference between making a sale and collecting the money), you want to spend it.
But, for several reasons, you want to get your ducks in a line first and keep your business and personal accounts separate to avoid commingling of funds.
What exactly is “commingling”?
Commingling of funds means that you are treating your business’s money as your own. Some ways to commingle funds are:
- 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 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
Keeping your corporate veil intact
“Piercing the corporate veil”.
Having your “veil pierced” sounds like a bad thing.
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.
Commingling of funds alone is usually not enough to have
Create a professional mindset with a separate business account
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 and inaccurate. Accounting is more than just doing your taxes.
Accounting tells you how your business is performing, what is doing well and what needs improvement. Sloppy recordkeeping and accounting means you can’t figure out which parts of your business are winners and which are losers. You won’t know which products have the highest gross margin, or which ads bring the highest return on investment, or which sales letter has the best conversion ratio.
You’ll simply be flying blind. That’s why you need a separate business checking account and a decent piece of small business accounting software. Quickbooks is great, and I personally found it easy to use. Quickbooks scales easily from a $500/mth website business to a business with annual revenues over one million dollars. I personally used Quickbooks for a company with 12+ employees and over $100,000/month in sales, which included selling both services and products.
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.
Most small business owners pay more than the law requires because they don’t have a system for keeping track of expenses. A separate bank account to run all your business transactions through is a “poor man’s” way of tracking all your expenses. You can simply use your bank statement as a list of all your business expenses.