Running a business is difficult. It’s busy. It’s complicated. It can get very messy. And it can be particularly challenging for business owners to draw clear lines between their business and personal lives – taking care not to mingle their financial affairs. But it is critical. Commingling your personal and business finances poses serious risks to a business owner, and this blog post will address why it should be avoided at all costs.
What is commingling?
Before you can take action to ensure you do not commingle your affairs, you need to understand what it is. At the highest level, commingling implies that a business owner treats business assets as though they belong to him/her personally. There are different activities that signal commingling:
- Taking money out of a business account to pay for personal expenses
- Using only one bank account for both business and personal needs
- Writing business cheques to pay for personal expenses
- Transferring money back and forth between business and personal accounts
Any of these activities can indicate there is commingling. It is not only illegal, but it is sloppy and can cause serious problems downstream.
Commingling makes it difficult to deduct taxes
If your personal and business transactions are all being run through the same account, you will not have a credible record of business expenses incurred. And if you don’t have a record, you can’t claim the deductions. It is critical that you keep track of your business transactions, independent of others, so that you can make credible claims when it comes time to file your taxes.
Commingling makes it difficult to assess the health of your business
If your funds are commingled, your accountant may struggle to draw conclusions about how your business is performing and where there are opportunities for improvement. Cash flow can be difficult to follow and smart business decisions are challenging to validate. If your business transactions are restricted to an independent account, the landscape is much more easy to assess.
Commingling puts your corporation at risk
As a legal corporation, your business is protected from certain liabilities. However, if you have commingled funds, you may have actually ‘pierced’ that corporate veil, and exposed your seemingly protected corporation to legitimate risk. After taking care to shield your company from that type of exposure, it is not worth sabotaging just to commingle funds.
Commingling will cost you money
There will come a time, even if you are able to get away with commingling your money, when it becomes too cumbersome and confusing, especially if your business is growing. And when that time comes, you will need to pay an accountant to separate your business and personal activities to clean the slate. It is a much better investment to get it right from the start.
If your business and personal activities are commingled, and you need help separating the two, contact Miller Bernstein today.