So, the number one rule of thumb for ANY business owner no matter the entity structure is to keep your business and personal finances separate. Alarmingly, many small business owners are not aware of this and unknowingly put themselves in a predicament of creating added liability. Let’s dig into that a bit.
When you establish your business, you chose an entity type to do things like reduce personal risk and reduce tax implications. When you comingle funds, and treat your business money as your own, you are essentially removing the separation of your personal and business. Have you ever heard the term “Piercing the Corporate Veil?” Well, if you are a dreaded “comingler”, you are creating a scenario where the IRS can pierce the veil. Sounds scary, and it should be. When the veil is pierced, any legal action taken against the business can impact your personal finances including assets like bank accounts and even your home.
The IRS is ever increasing their efforts to keep us all on the up and up. And the small business guy is a fantastic place to start. If you are a “comingler” and you find yourself in an audit for your business, understand that the IRS will likely need further investigation into your personal finances as well. This opens up scrutiny on your expenses and what should and should not be an allowed business expense. If it seems, in the slightest, that it is not a business expense, the IRS will likely disallow those expenses, essentially increasing your tax base. Simply put, by comingling funds, you have just endangered your deductions. Ouch!
Now, if that is not enough to scare you away from comingling, contemplate one more thing. When you comingle funds, you are likely getting an incomplete financial picture of your business. Profitability gets skewed and the health of your business doesn’t look so swell. If your business looks unhealthy, then lenders won’t lend. And, if lenders won’t lend…..well…you get the picture.
If you have been a serial “comingler”, there is never a better time than now to change. You can solve this by getting a business credit card and checking account. Use only the business accounts for business transactions and use personal accounts for personal transactions. Additionally, you should document, document, document. Make sure you have a paper trail (or e-paper trail) for all things business related. Remember that the IRS does not allow you to deduct business expenses that you cannot document. So when you document, you are protecting yourself on multiple levels just by being compliant. Oh, and as an added bonus, your bookkeeper will no longer need to thumb through all of your time-consuming, personal transactions. Think how much money and time you’ll save by not paying someone to track your personal transactions!
I get it! Trust me, I do. As a business owner, you treat your business like your life, because…..well, it just feels that way sometimes. But draw the line between your business and personal. Keep your personal assets safe and don’t lose those legal protections you established when you created your business.