What is Commingling of Funds?
If you are a small business owner, you probably have your hands full keeping your business running at full gear. Administrative tasks such as record keeping, taxes, and staying up to date with licenses and permits can feel daunting, but it’s important not to ignore these things. Keeping your finances straight is particularly important for a variety of reasons. Today, we’re going to talk about commingling of funds—what is it, and why does it matter?
What is the commingling of funds?
Commingling of funds means that you treat your business’s money as if it was your own. Some examples of commingling of funds include:
- Paying personal expenses from your business checking account (without proper documentation)
- Depositing checks payable to your business in your personal bank account
- Using your personal account to pay for business expenses
- Using your personal credit card to pay for business expenses in order to earn point
- Moving money back and forth between your business account and your personal account without properly documenting the transfers
Why is commingling funds a problem?
If you operate as a sole proprietorship, commingling funds may not be a problem, as there is essentially no difference between you and your business. But if you operate as an LLC or a corporation, commingling funds can be a problem, and could cause you to lose the protections you gained by incorporating or registering as an LLC in the first place.
The issue comes when you “pierce the corporate veil.” If you ever run into legal or financial trouble with your business, courts can allow your creditors to pursue your personal assets if they decide you’ve pierced the corporate veil—meaning you’ve blurred the distinction between yourself and your business.
Courts will look at several factors when determining whether the company’s veil has been pierced, but the commingling of funds is a big one. If you treat your business’s money as your own, you put your personal assets at risk in the event of any problems.
How do I avoid commingling funds?
Mixing your business and personal funds is risky, unprofessional, and makes your accounting unnecessarily complicated. It can lead to errors when it comes to tax time, as well as put your asset protection at risk.
The easiest way to avoid the mistake of commingling funds is to establish a separate bank account and credit history for your business, and be meticulous about keeping your personal money separate. Keep track of receipts and invoices. Being diligent about separating and tracking business income and expenses and keeping rigorous books and records will not only help you protect your personal assets—it will also be a tremendous benefit when it’s tax time.
Reducing taxes with meticulous business records
Here at Prime Corporate Services, our biggest mission is helping you set up your business the right way so that you can keep more of what you earn. A big part of that is helping you learn how to optimize your deductions so that you’re deducting as much as you can each year. But in order to accurately deduct your expenses, you have to accurately track your expenses! If you don’t have a record of it, you can’t deduct it.
Keeping your accounting clean with separate business accounts helps tremendously when it comes to documenting deductions.
I’ve already comminglied my funds—how do I fix it?
Prime Corporate Services can help you set up your business on day one to avoid all the common pitfalls and hassles of running a small business—just reach out for a consultation to get started. If your LLC is up and running and you’ve been commingling your personal and business funds, it’s not too late to correct things. Our CPAs and tax advisors can help you untangle the expenses so you’re back on track for a successful year, and help you set up systems to avoid problems in the future.