Starting a business often involves small steps before someone creates a formal business entity. They might buy a website first, create a few prototype products or otherwise make purchases on behalf of the business before it officially exists.
These small transactions are often important in the early stages of business development. Unfortunately, using personal finances for business costs can be one of the biggest mistakes that someone can make when they want the protection of a limited liability corporation (LLC).
Conducting financial transactions using your own resources or bank account on behalf of the business could leave you vulnerable in the future and undercut the most important protections of an LLC.
Using your debit card for business purchases is a form of commingling
The reason you create an LLC is to have a separate legal entity that helps shield you as an individual from business liability. You don’t want to lose your home or future income due to claims by business creditors or those who have employment or liability-related claims against your business.
If the company fails or winds up in massive debt, both you as an individual and your personal assets have some protection from financial claims by others because the company is an LLC. However, if you commingle your own assets with business resources by using your own bank account to make business purchases, you could find yourself in a vulnerable position in the future.
The sooner you create an LLC and separate its finances from your own, the more likely it is that your LLC will protect you from claims against your business. Understanding how commingling can undermine the benefits of forming an LLC makes it easier to protect yourself in the early days of starting a business.