Resist The Urge To Commingle Funds

How entangled should your personal and business finances be? Many small-business owners may be put in a precarious situation if they commingle funds and then things go sour during the pandemic and ensuing recession.

Paying your business expenses from your personal accounts puts you at risk for possible personal liability. Resist the urge to pay expenses or payroll from your own pocketbook or credit card, and do not use funds from your retirement account.

Here’s why:

1. Paying business expenses directly from your personal accounts can make you vulnerable to a creditor’s claim that you weren’t running your business properly and therefore your personal assets should be open and available for collection.
2. Many small-business owners form a business entity such as a limited liability company to protect against their personal exposure. But protection isn’t absolute.
3. It makes accounting difficult and inaccurate. Accounting is more than just doing your taxes. It tells you which parts of your business are winners and which are losers instead of flying blind.
4. Keeping track of business income and expenses is crucial to minimizing taxes and maximizing deductions.
5. If you’re running part of your business from your personal account and part from your business, it’s difficult to know if your business is profitable or how it is performing.
6. If you are paying expenses from personal funds because your business isn’t generating enough money to pay them, you need to ask yourself some hard questions about the viability of your business before you dig a deeper hole.
7. The IRS could declare your business to be a hobby, in which case, you may need to pay more in taxes and penalties to overcome all the deductions you’ve been taking.
8. If you’re financing your business with personal debt and the business potentially expires, then you’re saddled with increased personal debt and it will be harder to secure financing for your next business venture.
9. Borrowing against your home may seem an attractive option but if you lose your business and cannot pay the mortgage, you risk becoming insolvent.
10. Defaulting on a business loan can have business and personal consequences if you signed a personal guarantee.

Your personal assets could be at risk as well as your business.

Here’s what to avoid:

1. Depositing payments made to your business from a client into your personal bank account.
2. Making withdrawals from your business checking account to pay personal expenses without documentation.
3. Using the same bank account for your business and personal needs.
4. Writing business checks for personal expenses.
5. Using a personal credit card for business expenses to get points.
6. Moving money back and forth between your business and personal accounts without documentation.
7. Using personal money to pay for business expenses.
8. Making personal purchases on a business account and not including the expenditure in your payroll as a fringe benefit.
9. Transactions categorized as miscellaneous will very likely raise a red flag to the IRS.
10. Not properly classifying personal funds used to start your business or make a loan to it. You need to make sure you properly account for the money on your business books so you accurately track the amount your business either owes you or how much ownership you have.