Life moves fast when you’re running a business. Mistakes are inevitable.
If you miss a meeting because you’re double-booked, you can usually reschedule. If an employee quits, you can use those twisty gears in your noggin to figure out how to hire and train an alternative. Running a business requires flexibility, ingenuity, and the ability to maintain your humor while problem-solving.
But what if you make a big mistake?
Even big is a relative term, I suppose. But when you’re dealing with the finances of a small business, there are places where there’s room for error. And then there are places where you’ve got to draw the line.
Commingling personal and business expenses is the latter.
What is Commingling?
“Commingling” is pretty much what it sounds like. The word has etymological origins in the 1620’s meaning “to mix together, blend.” And that’s exactly what it is.
Commingling refers to the act of using personal funds for business expenses, or your business account to pay for personal expenditures.
Sound innocuous? Think again.
The risk of blending or mixing personal and business finances can’t be overstated. And it isn’t limited to the small business sphere, either. Lawyers have strict rules about commingling client money. If you think about it, most prenups are just contracts helping couples reduce the potential hazards of too much unstructured commingling.
As a small business owner, it is imperative that you understand why and how to avoid this dangerous oversight.
Types of Commingling
In order to prevent commingling, it’s important to be able to recognize it when you see it.
Take the following situation. A client gives you a check, and you accidentally deposit it into your personal bank account. No big deal, you’ll just transfer the money over tomorrow.
Or how about this: let’s say you’re taking a potential buyer out to lunch, but you left your business credit card at the office. So you put it on your personal credit card. You’ll reimburse yourself later, it’s fine.
Or let’s say you’re at the grocery store. You’ve loaded up an entire cart full of groceries, your kids are waiting at home for dinner, and you realize your personal card is not in your wallet. You took it out to buy something online earlier in the day. You don’t have any cash on you. But you do have your business credit card. It’s only once, you think. I can sort the finances out easily enough.
All of the above situations are examples of commingling: using business accounts for personal spending, or vice versa. And you’re right in some ways — most of the above situations can be sorted out.
But it’s a slippery slope.
Solving commingling mistakes is not only a hassle, but without proper documentation things can get very messy.
Commingling Personal and Business Expenses will muddy your accounts.
Depending on the size of your business, sorting and correcting accounting disparities related to commingling can be more or less of a big deal. But wouldn’t you rather have no deal at all?
Let’s be real. You get back to work in the afternoon after the business lunch, and you forget to write down the expense. You unload the groceries, and your screaming kids knock all financial thoughts out of your brain. I’ll do it later, you think. But soon “later” turns into the end of the quarter, and your CPA is asking what the heck this $72.48 at the grocery store was for. Was it for the office restroom paper products? Or your family’s supply of macaroni and cheese?
Keeping accurate and current books is vital in order to establish how well your business is performing. You can’t course-correct on what you can’t see, and sloppy books are like a sea captain having two eye-patches. With accounts muddied by untracked commingling, you’re in danger of steering yourself right into business peril.
This is even more important come tax season. If you’re guilty of undocumented commingling, not only will you stress out your trusty accountant, but you risk missing obvious deductions. Paying more in taxes than you need to is not good business practice.
Plus, sketchy accounts get audited. Nobody wants that headache.
Commingling Personal and Business Expenses will get you into legal trouble.
Aside from trouble with the IRS come tax season, commingling can get extremely dicey if your business is at all financially shaky.
No matter the size of your business, commingling is bad business.
As a sole proprietor, the IRS recommends that you have separate personal and business accounts. And we “recommend” you have separate personal and business accounts the same way we “recommend” that you wear shoes when walking over broken glass in a dirty alley.
But as an LLC, C or S Corporation owner, this is an entirely different issue. While there’s a teensy bit of leeway with LLC’s, the rules get much, much stricter the larger you get. The umbrella of protection provided by an LLC, C or S title means that even if your business goes bankrupt, you are not personally financially liable for those debts.
But watch out. Because the minute you establish any sort of pattern of commingling funds, you risk questions about the integrity of your business practices.
What do I mean by integrity? Well...
Commingling Personal and Business Expenses may cause personal financial ruin.
Not to get too dramatic, but the liability protection provided by your registered entity is absolutely vital to not only the business’ well-being, but your personal financial well-being.
The minute you get careless with commingling, you’re putting all your personal assets at risk. That liability protection we mentioned above is known as the “corporate veil.” And in a lawsuit or legal dispute, any evidence of commingling will be used by lawyers to “pierce” that corporate veil.
That is, they’ll argue that you are now personally liable, and all your assets forfeit, to any existing corporate debt. Ouch.
I take it back. Commingling won’t just ruin your business. It can ruin your life.
Just be smart, careful, and organized.
So how can you prevent these nightmare situations?
Strictly maintain separate accounts. Promptly document and resolve any commingling mistakes. Keep those personal and business accounts single and not ready to mingle, and you’ll be fine.
And if you have any questions about resolving commingling issues, hit up Know Your Numbers for prompt, expert advice.