Most business owners would never consider using money that belongs to the business to pay for personal expenses. However, they might not think there’s anything wrong with using personal assets to help out the business – like maybe putting a little of their own money in to pay bills when they’re going through a rough patch. However, commingling personal and business funds – regardless of which way the money is going – can cause all kinds of problems.
If your business has a legal structure that prevents you (and any partners) from having personal liability in a lawsuit or other claim against the business, you destroy that by commingling funds. The term for that is “piercing the corporate veil.” Further, if you use business assets to pay for personal items, you could be violating fiduciary responsibilities and violating the law.
What if you have a sole proprietorship?
Even if the business is set up as a sole proprietorship where there’s no “corporate veil” of protection against personal liability, it’s still wise not to commingle personal and business assets. For one thing, by avoiding commingling, you make your general bookkeeping – not to mention your taxes – less complicated. You’re less likely to make a serious error on your business (or personal) taxes that could land you in trouble with the IRS.
Further, if you hope to grow and/or evolve your business, you’ll likely need to seek additional financing at some point. By keeping your business and personal funds completely separate, you have much cleaner financial records to hand over when you apply for a loan.
The easiest way to avoid commingling is to keep separate accounts. That sounds simple, but it sometimes requires an extra step or two. For example, say a customer pays you for a job you did for them. Maybe it’s exactly the amount of the salary you need to pay yourself this week. Why not just deposit that check straight into your personal account? Because that’s commingling your funds. You need to maintain a clean paper trail – even though much of it isn’t literally paper these days.
What if all this information is helpful, but a little late? If you’re facing a lawsuit or other legal issues caused by the commingling of personal and business assets, it’s wise to seek legal guidance as soon as possible.