Why Commingling Business and Personal Funds Is Not a Good Idea

Commingling funds is a pretty universally frowned upon business strategy; although, is fairly widely practiced in small businesses.

For those who don’t know what “commingling funds,” is it is when a business owner pretty much treats their business funds as their own. Some common practices range anywhere from depositing checks made payable to their business in to their personal account or using business money for personal reasons or personal expenses; basically, commingling is the intertwining of business and personal funds.

‘Corporate veil’ is a legal expression to describe the best business practice of keeping business funds and personal funds separate, clean and documented. When someone commingles their finances they can end up getting their corporate veil pierced. When a company goes through all the work of becoming an LLC or corporation there are many activities and documents completed to protect the business owner with a ‘corporate’ wall so they limit their personal liability. There are Articles of Organization, filing fees, Operating Agreements and the like. Legal troubles can put all the incorporation efforts at risk if the court determines that the veil has been pierced.

When courts look into whether or not to “pierce” a company’s “veil,” one of the first things they look into is commingling of funds. When funds are found to be commingled, courts will then hold your personal assets liable. 

All this information is fine and dandy, but what do we do to keep from our business veil from being pierced? Thankfully, it’s actually quite simple, if you can keep with the mindset. 

Viewing the funds as two separate entities is a great start to keeping a professional mindset. Even as a small business it is important to set up separate accounts for your business and personal needs. Personal tax and business tax are treated differently. Your personal expenses may not qualify as a valid business expense. It’s best to keep things separate and consult your CPA for issues that may be unique to your business.

Many people view commingling as a sloppy practice. It’s bad legally but it is just bad business.One of the main reasons it’s bad business is because it makes accounting very difficult and inaccurate. It can be a way to shelter earnings, under report taxes and hide other legal and tax obligations.

Accounting tells you how your business is doing and is used to show you how to improve your business and where you don’t need to spend so much time improving. When commingling, it can be difficult to find out where your personal finances begin and your business finances end. Cash flow issues can be difficult to navigate. Without being able to clearly define each part you will have trouble seeing which products and services are performing well or not. 

When commingling you could be cheating your business and putting yourself at legal risk.

Do you have a question on commingling – we’d be happy to answer it.

Again, thanks for reading and leave a comment or question below!

Posted on October 29, 2013 .