The danger of commingling funds

The dangers of commingling funds

Think you’re protected and can rest? Well, maybe not.

You worked hard and attained personal assets and wealth and you want to protect them from the multiple things that can go wrong in your business. So you took the time and either incorporated, or created an LLC or partnership.

Commingling funds is one sure way to unintentionally create an avenue for your company’s veil to be pierced and for you to be held personally liable for your company’s debts and lawsuits. How does that happen? By treating your businesses money as your own. Do you pay personal expenses out of the business account? Then you are Commingling funds.

Here are some examples of commingling funds:

  • Not having a separate business bank account.
  • Making withdrawals at will from the business account to pay personal expenses.
  • Writing checks from the business account for personal expenses.
  • Making business deposits into your personal account.
  • Making personal deposits into your business account.
  • Carrying personal credit cards/loan on the company books.
  • Moving money between business and personal accounts without any documentation.

So how do you avoid commingling funds? The first thing is have separate bank accounts, one for your business, and one for personal use and document any transfers between the accounts. Other than payroll, corporations issue either distributions or dividends depending on their formation and document them in the corporate records. Partnerships and LLC’s have guaranteed payments or draws. All types of payments are done on a regular and scheduled basis, say quarterly, semi-annual or annual. For more information on these types of payments check with your tax preparer.

Do not carry personal credit cards or loans on the company books. If you use credit cards, the business should have its own. Don’t buy a car or equipment for the business using your personal credit. Buy or finance it in the company’s name.

There is one last benefit, simpler and more accurate accounting. By not having to take the time to determine if this is a business or personal expense you save both time and money. The financial statements are more accurate giving you the information you need to manage your business and increase your profitability.